Core question: What is the public market valuation bump from a partnership announcement for biotech companies?

Key takeaways:

• Overall, partnership announcements offered a marginal valuation bump that was typically traded away within a month
• Deals with key characteristics benefitted far more, including those with: (1) big pharma, (2) disclosed economics, ideally >$10M upfront and / or >$1B total, (3) micro-cap companies (at the time of deal announcement) and (4) platform-informed deals
• While the valuation bump is mixed, high-quality partnerships are still an important signal of the long-term health of a company, including via platform / technology proof-of-concept, dissemination of critical know-how or a catalyst upon which to raise additional funding 

Background & Approach

Partnerships (along with M&A) are seemingly the lifeblood of the biotech industry. It seems as though an army of business development folk have been deployed by companies of all sizes to secure the next deal, and not without good reason: the right one can set a company up for years of sustained success. Particularly for smaller biotech companies that do not have exceptional proof-of-concept data or a marketed asset to point to, a partnership can be a lighthouse in a storm. In addition to external validation, it offers an opportunity to build relationships with industry leaders, introduce missing procedural and technical know-how or be the catalyst upon which to raise additional funding.

Conventional wisdom also notes that partnerships provide a valuation boost for smaller biotech players – that investors will reward companies that sign these deals with significant stock price bumps. I wanted to assess whether the data aligned with this view.

I looked at 444 biotech partnerships across 80 US / EU public companies with no marketed assets from 2013 to September 2022. Partnerships exclude M&A and predominantly include co-developments, licensings, R&D collaborations and joint ventures. I focused on clinical and preclinical stage companies as these companies would theoretically benefit the most from partnership validation. While all companies are mostly valued based on clinical and commercial success, early-stage companies have smaller pipelines, less data readouts and don’t generate much revenue. With less to go on, the value of a partnership to investors should seemingly increase.

For each company / deal combination, I calculated the market cap just prior to the deal announcement, and then calculated the cumulative change in value 1-day, 1-month and 6-months after the deal was announced. The cumulative XBI (an equal-weighted index of US biotech stocks) change over the same period was deducted in order to highlight performance vs. the index. By measuring valuation change, I also corrected for any skewing that would occur based on unequal share prices. While many factors unrelated to the deal could impact share price by the 6-month mark, I believe it is an interesting signal around the durability and momentum of certain deal characteristics highlighted below.

The Results

First, a data dump:

 

 

Looking across all deals, we only see a marginal bump when a partnership is announced and all gains are traded away within a month. However, there is a lot of noise in this data, with different types of partnerships, company sizes and economics. Analyzing the same data set across various sub-groups offers some interesting takeaways:

• Having a big pharma partner is a big benefit, with a 7.0% median 1-day pop, that was sustained over time. These deals tended to have larger disclosed economics, offer the best “commercial validation” for smaller biotech companies and serve as a potentially lower cost of capital than sources offering equivalent funding, so the impact isn’t surprising
• The smaller the company, the larger the benefit. Beyond micro-cap (<$300M) companies, the benefit is marginal for small-cap (>$300M, <$2B) and negative for mid-cap (>$2B, <$10B). While deal sizes for micro-caps tended to be slightly below their larger peers, the relative return was more meaningful. Additionally, the intangible benefits of an experienced partner are recognized by the market, predominantly as an external validation of a company’s approach, technology or platform.
  • It was interesting to see small and mid-cap returns skew negative, but digging into the data revealed a recurring trend: deals in which the lead asset was licensed away. Despite the cash infusion, the market often rejected these stocks due to a perceived lack of direction. With so many options to pick from in the public market, just having a lot of cash is not enough of a justification to hold investor attention

 

• Signing a repeat deal with a company helps. Seeing a partner sign up for more is a strong signal that the company’s team, approach and technology is legitimate. It also helps that repeat deals tend to have higher economics as the collaboration scales, building on prior successes
• Disclosing economics supported a bigger bump, which isn’t surprising as there’s a bias to disclose when the deal terms are better or larger
• Size matters: the larger the upfront payment and total deal size, the higher the bump – with an important caveat. While it makes sense that larger deal economics are rewarded with a larger valuation increase, I wanted to assess the valuation change excluding the upfront payment. The idea being, if a company was to receive a $100M upfront cash payment, and the market cap only increased by $100M, then investors simply adjusted for the higher cash balance, rather than rewarding the stock incrementally above the upfront payment. After performing this adjustment across all three sub-groups, the return was mostly negative, indicating the valuation gain was less than the announced upfront payment
  • Interestingly, for deals <$1B but with upfronts >$10M, the return was even more negative after 1-month, by which point these companies theoretically would have collected the entire upfront payment, reducing any overhang that the deal would fall through
  • After digging into these deals more, the trend is similar (and associated) to what is seen for small and mid-cap returns broadly: most deals involved licensing away a lead asset, and while the market appreciated the cash infusion, it either questioned the direction of the company moving forward or had hoped for higher economics from the deal. Asset dilution is an underrated aspect of these deals, as peak economics are meaningfully capped, even if near-term R&D spend is meaningfully reduced. Recall that for many biotech investors, an acquisition is the best-case scenario, and large partnerships tend to encumber lead assets and limit the buyer universe

 

• While initially there didn’t seem to be a meaningful difference between platform and non-platform company performance, I dug deeper into the platform company deals with disclosed economics and further segmented it by “platform-informed” vs. “non-platform-informed”
  • First, what is a platform? Broadly speaking, a platform is either a fundamental science discovery, engineering innovation or differentiated technology that is novel enough for it’s time to build a company around⁽¹⁾ – there is an “expiration date” such that if everyone is doing it, it’s no longer a platform⁽²⁾
  • I defined “platform-informed” as deals in which the there was more than just an exchange of assets – the platform would meaningfully support the partnership moving forward by identifying or developing the assets / know-how that the collaboration is based around
    • “Non-platform-informed” is the opposite – while the company may have a platform, this deal was simply an exchange of assets for downstream economics, with the partner largely assuming development moving forward
      • The nuance is that in the former, platform companies are not just licensing away their assets, but rather offering meaningful value-add on top that can de-risk development & support true platform validation
      • The result was that “platform-informed” deals offered the highest 1-day pop, although long-term performance across all sub-groups has trended negative;
        • Many of these deals were signed in the last 18 months (not enough time to reach critical milestones), while also facing macro market headwinds, thus I’m hesitant to make sweeping conclusions without more data

1. Paraphrasing from Liang Chang and Kirill Karlin’s platform deep-dive article 
2. Deals included stretch back to 2015 and thus were categorized in the context of their time

 

So, what does an ideal combination look like? Having at least two of the following typically results in >10% 1-day pop that is sustained after 1-month:

🗸 A big pharma partner

🗸 Disclosed economics: >$10M+ upfront and / or >$1B total deal value (often these go hand-in-hand)

🗸 Micro-cap stock (obviously, not something to optimize for)

• What didn’t matter much: whether a company was preclinical or clinical stage, whether the partner was broadly industry or academic or the number of deals a company had done previously

Implications

This analysis doesn’t account for the many small private biotechs for whom a partnership is the lifeblood of success. For those companies, a deal can offer an extremely important proof-of-concept signal, internal validation and potentially a flash point from which to raise additional funds to keep the company alive. If a wholly-owned program is split via a partnership in exchange for an upfront payment, then the company is shifting potential equity dilution (i.e. having to raise that same money from investors) to asset dilution (placing a cap on peak economics). For early-stage biotechs with early-stage programs, this is often a trade they are willing to make.

The lagging 1-month (and 6-month) performance for deals across nearly every metric plays into a well understood dynamic of the biotech public markets: what have you done for me lately? Stocks with no news or no intriguing near-term catalysts often trade sideways or down (we see this after companies license away a lead asset – the cash infusion doesn’t cut it without promising assets to back it up). With so many options to pick from due to the low barriers to entry for new companies over the past few years, investors simply move on, highlighting the importance of anchor investors in your stock. It’s also not uncommon for biotechs to issue follow-on rounds to capitalize on share appreciation (thus pushing their price down as investors react to the news), although this is more common after great data.

Lastly, the long-term data suggests that companies that license away their key assets tend to trade down over time. These deals encumber lead assets, limiting M&A opportunities, which remain the best exit strategy for public biotech investors. With peak economics meaningfully capped, there is pressure to deploy upfront cash windfalls on new programs, but given the rate-limiting pace of biology and the immense competition, investors often just look elsewhere. This dynamic cuts across platform companies as well, with “platform-informed” deals performing markedly better in the short-term than their asset-driven counterparts. However, the recency of these deals means we need to see more data to properly evaluate this dynamic for the long-term.

So, what does this all mean? The takeaway is that unless the deal is transformative, don’t expect a valuation boost. There is a clear trend that as a company matures, it becomes increasingly valued on assets or drug sales, rather than technology, know-how, platform proof-of-concept, partnerships or any other intangible validation markers. With that said, high-quality partnerships are still an important signal of the long-term appeal & viability of a company. Getting another company interested in what you’re selling enough to invest their own resources is an important litmus test for any startup, and biotechs are no exception. Furthermore, it is often through these biotech partnerships that the next-generation of assets are discovered, developed and commercialized. While they won’t move the needle on their own, industry collaboration is an engine for progress, and the benefits will accrue to the players over time.