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(Don’t Fear) The Partner: Why Signing An Early Strategic Biotech Partnership is Not the Beginning of the End

As a founder, how do you place a value on your intellectual property, your customers, and your freedom? How can you possibly share these assets equitably with a large partner? Founders of biotechs and their investors have good reasons to be careful signing up with a strategic partner too early. However, there are ways to structure relationships as a win-win-win, creating value for the start-up, the strategic partner, and the customer.

Here are three common fears regarding early-stage strategic partnerships, and ways a founder or investor can overcome them to be successful.

An explorer chooses an unknown path forward
Early partnerships in biotech often lead to new opportunities. Credit:

This story is inspired by true events. It is based on my own experience and that of founders and investors. All names and relations are purely coincidental. With that, let’s begin.

It all started with an email

You hear a familiar chime and open your inbox. It is an email from your program manager at the NIH. In bold print, you read “Congratulations, you are awarded a $2 million Phase 2 SBIR grant for project titled…” Finally, the right reviewers read your grant. The awarded funds will be used to support development on a new drug based on your research into a mutation implicated in a rare type of solid tumor.

Nine months later the money hits the bank and your team is busy working in the lab. Intellectual property (IP) in-licensed from the university broadly covers the chemistry and hopefully your lead candidate. Additional composition of matter and method of use IP was filed last week as a continuation to the initial application to extend patent protection. Happy with the progress, local seed-stage investors write you a check for $600,000 to supplement the grant and your friends and family money. So far so good, but your investors need to see good toxicology data before you are able to raise your next round. You want your next round to provide runway into human trials and an interim readout.

Fast forward twelve months. All the “lead” compounds tested-to-date are too toxic in exploratory studies, even for an oncology indication. The rats are losing too much weight, you are running out of money, and your investors aren’t thrilled, especially after they invested more in a bridge round with SAFE notes. They called you on your birthday, not to wish you a happy birthday, but to ask you when you are going to have a development candidate that looks good in tox.

Late one afternoon you hear that gentle chime again. It’s an email from TishuGenix (TG), a well-known formulation company. Their business development (BD) person states they have a drug delivery technology they want you to look at. You review the non-confidential deck and think it might help solve the toxicity issue. A feasibility study is designed and you pitch your board on potential structure with TG.

Fear # 1: You will lose rights to intellectual assets

As an entrepreneur, you need to be a master at managing risk (Figure 1). The first patent applications are undergoing prosecution; some claims may be amended and others thrown out. The first concern you hear from the seed investor, now board director, is that you will lose the ability to protect your lead compound if you dive in too early with a well-financed collaborator should the study be a success. They do not want the company to be out-maneuvered and/or blocked from filing continuations or additional IP to broaden the scope. TG may want to assert rights through jointly foreground IP if you lock arms in a co-development agreement. You speak with your legal counsel to determine a plan.

Figure 1. Three Types of Risk Founders and C-Suite Must Manage

De-Risk Through Optionality

Your goal is to develop and select a safe-enough compound to de-risk IND-enabling studies with cash on hand, minimizing upfront payment to access enabling technology. This reduces business risk. A six-month option with TG and small upfront exclusivity fee ensures you retain IP on the active pharmaceutical ingredient while providing enough time to get more data on whether the combined formulation reduces toxicity. Another approach would be fee-for-service through a contract research organization (CRO). TG’s model is focused on licensing and royalties, so they prefer to execute the option. It also saves time and money that would go into negotiating and executing a full license. This reduces legal risk.

Last, there needs to be mutual understanding on objectives when working together, so an option provides time to get to know the BD and R&D folks at TG while they complete the formulation work at their facilities. They need to trust you as well. This reduces human risk.

Plan for Failure, Prepare for Success

The pilot study is a success. The rats are not losing weight, even at the highest doses, providing a meaningful therapeutic window. Histopathology images also look promising and the tumors expressing the mutation are actually shrinking. The TG folks love the results too, so much in fact that they insist on a co-development agreement, and out of this, joint-ownership of the drug candidate.

Fear # 2: You will lose market opportunities

Your seed investor is concerned that if you sign a joint development agreement (JDA) with a strategic like TG this early it will limit future opportunities, possibly dissuading other pharmaceutical companies from licensing the drug product or acquiring the company down the line. The better route may be to raise more funding now and in-license the formulation technology from TG, paying an upfront and developmental and commercial lump sum milestone payments, plus running royalties on net sales. Deal comps suggest the upfront payment plus development expenses required to reach a clinical inflection point would put you beyond the amount you can raise with the pre-money valuation you were targeting a month prior. You only have animal data from a single--albeit well run--study.

Consider Both Non-Dilutive and Dilutive Financing

You initiate a formal process to evaluate funding alternatives while simultaneously building trust with the TG team, facilitated by your BD contact and internal R&D champion. One idea is to leverage your existing relationship with TG and involve their investment arm to see if genetically-defined solid tumors is a space they would be interested. They can contribute to the next round of financing and have a part of the success of the opportunity while maintaining a level of oversight. A Series A raise, boosted by the credibility of TG Ventures, should be sufficient to execute a license without having to sign a JDA and give up a portion of the IP and potential marketing rights.

Complexity Takes Time

This arrangement will require a lot of oversight and it is important to consider its complexity. While TG considers investing, they are adamant to also execute a JDA as they believe their R&D team is better positioned to integrate the technology. This entails tracking departmental funds that cover direct R&D costs and while allocating equity investment toward indirect costs and SG&A. Not only that, your Phase 2 SBIR grant is still active so there is government reporting as well.

Understand that alliances involving multiple groups of a large organization, such as R&D and venture teams, will require a significant time investment by you and your management. Additional R&D reporting as well as preparing for board meetings takes a lot of time, so make sure you hire resources to help manage these aspects, or your Chief Scientific Officer or inventor CEO may be diverted from building the technology. Consider additional accounting support and alliance or BD professionals to support this work.

Fear # 3: You will lose control

The seed investor strikes a chord with you, the founder: sign this deal and you will not only lose control of the company, but your research--who your baby becomes when they grow up. They say a 50-50 JDA can be tough to manage even with a well-represented steering committee (SteerCo). However, you advocate to your board that this arrangement provides credibility and the necessary resources to speed up preclinical development. While considering the pros and cons, your phone rings. The CEO of TG has an offer for you. They will lead your Series A round if you sign a JDA and this offer expires in 72 hours. An early strategic partnership gets you to clinic quicker and to patients who rely on new treatments.

An ad hoc meeting with your board is called and its time to align on next steps.

Early-Stage Partnerships Can be Critical

According to a recent study, 83% of biopharma alliances rely on partnerships to a “very high” or “high” extend to achieve success. The same survey states that 91% of alliances were similarly or more successful than internal programs (Vantage Partners, 2024 survey). Armed with this information and the key objectives in an R&D plan, you present to your board your recommendation. The majority of the board approves and you scan an send back the signed Term Sheet (TS) at hour 71. It is important to have a good lawyer for this next stage of the negotiation.

Although key items are agreed in the TS, there are particulars around the development plan that need time to hash out. Due to time and support required, you request an upfront payment to assist with legal fees and overhead. You start negotiating a research plan to be covered under a Sponsored Research Agreement (SRA) and an equity investment to be covered under a Stock Purchase Agreement (SPA), among other documents. The TG CEO prefers to make the investment through their venture arm and nominate a board member you have never met. Other items are determined, such as SRA SteerCo chairs and research plan and milestones. Some terms are non-starters, i.e. negotiate a Right of First Negotiation instead of a Right of First Refusal.

Remember: A failed alliance will not have the same impact for a large company as it will for a small company, so may sure the terms work for you today to avoid tough conversations in the future.

A Signed Agreement is Just the Beginning

It is kick-off time! A timeline is communicated to all internal and external stakeholders and soft-circled investors write checks. Although things take longer than expected, the Series A is oversubscribed and IND-enabling studies are well under way. The whole fundraising process takes about four months since TG committed to lead the round. The remaining funds are wired and the alliance is in place with a SteerCo meeting cadence established. Teambuilding activities build trust and the joint teams have agreed on goals and metrics for success, periodically revisited in alliance health checks (Figure 2).

Figure 2. Health Scorecard Goals and Metrics to be Revisited during Alliances

The road to clinical readouts is long and bumpy, but you are happy with the team you have in place. Your partners at the NIH, investors, CROs and TG team support your internal team and consultants to create an stronger force than if you went at it alone. This is personified by the formulation of your drug and TG's delivery technology, the combination of which now cleared to initiate Phase 1 clinical studies.

How to maximize success of an early alliance?

As noted above, partnerships are very common in the biotech industry and their success often makes or breaks smaller companies. Complex agreements, such as those involved R&D teams and venture groups, tend to be less successful, but can be more rewarding. Initial partnerships should explore an option period to decrease risk before expanding the partnership. This is important because it allows both parties to build trust, understand each other’s culture, and minimize technical pitfalls. Partnerships can be structured to explore R&D objectives first, and once successful, revert the rights back to the originator company or progress to further co-development. Importantly, partnerships and alliances need to have buy in of organizational champions with a shared long-term vision.

In summary, the founder of a small biotech, including their investors, need to align why an early-stage partnership makes sense. Whether its capital, technical validation, expertise, market access or credibility, the alliance brings an advantage to the biotech in exchange for IP or market rights and always services to benefit the patient or customer.

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