A biotech company can spend years and millions of dollars generating solid data and still find that its asset is no more compelling to a potential partner than it was before the study began.
I see this often as a licensing consultant. A company reaches Phase 2, the data are promising, and the team is understandably excited. But if the candidate doesn’t have a commercial story, the result won’t change the licensing conversation. Meanwhile, another company solves a problem that has held back its whole drug class, and becomes far more interesting to a partner well before Phase 2.
So which studies actually create a “value inflection point”? There’s no single answer. It depends on the therapeutic area, indication, target, modality, competitive landscape and how the standard of care is likely to evolve. A study that meaningfully changes the outlook for one asset may add little to another. For a company deciding where to put its next dollar, the key is to understand what a potential partner still needs to believe about the asset, and the most efficient way to demonstrate it.
Do you need Phase 2 data before you can license?
The most persistent myth I run into is that you must have Phase 2 data before a pharma partner will do a serious deal. The data doesn’t support it. Recon Strategy, reviewing two decades of deal records, found that roughly 26 percent of assets licensed for more than $10 million by US or EU-based biopharma companies were preclinical at the time of signing. Other sources suggest that 40 percent or more of Big Pharma licenses are for preclinical candidates. In other words, a meaningful share of deals are signed before the asset has ever been given to a patient.
In my experience, those deals tend to have something in common. The asset is innovative enough or solves a problem that has held back the field, giving a licensee a reason to take on some of the development and clinical risk itself.
Let’s be clear about the trade, though. Early deals are structured so that most of the value stays contingent. In that same analysis, roughly five percent of a preclinical deal’s total potential was paid upfront, and licensors realized under 20 percent of the headline figure even nine years later. The earlier you license, the more development risk the licensee is taking on, so there is a risk and reward to weigh deliberately. And this has profound implications for the overall business plan of the company, the amount of capital raised, the number of candidates they can discover and develop, and so on.
What does your Phase 2 need to demonstrate?
If Phase 2 is the milestone that matters for your asset, the next question is what that study needs to prove. That answer depends on what the competitive landscape requires. If your candidate is novel enough, a placebo-controlled Phase 2 may be all it takes to get a partner’s attention. Being ready to start Phase 3 is a separate question, and it depends on the indication, regulatory expectations and the overall development package. In a licensing deal, Phase 3 is typically the partner’s to run, so what you are really demonstrating is that the asset is worth their Phase 3.
In a crowded indication, the bar can be much higher. You may need to compare your drug with the current standard of care, or show that adding it to the standard of care produces a meaningful improvement. The right comparator depends on the competitive landscape and where the standard of care is heading.
That means you need to look beyond your own program. You may be designing a Phase 2 study today against a standard of care that is likely to change before you reach the market. In fact, there are numerous examples of treatment paradigms which have shifted radically, such as psoriasis. In some areas, the existing standard of care is so much better than it used to be that developing something new and improved will be incredibly difficult to do and prove (cf., HIV/AIDS). Understanding what is happening outside your own program is as important as the protocol itself.
Does solving a CMC problem change the valuation?
Phase 2 isn’t the only place a program can meaningfully de-risk itself. Whether CMC work moves the needle depends on the modality and the problem you’re solving. If you’re a small company with a run-of-the-mill small molecule, where the class is well understood and the compound is soluble, CMC is unlikely to be what moves your valuation. Solid CMC data remains table stakes and is a requirement, but the clinical data is what a licensee wants to see.
If you’re working in a modality where manufacturing, purification or stability is a genuine problem, the situation is very different. For cell therapies and other complex modalities, CMC can be one of the central challenges standing between a promising candidate and the clinic. If you’ve solved a manufacturing, purification or stability problem that is holding back other programs, and you’re moving toward an IND and Phase 1, that may make a difference. You have addressed a risk (at least at that scale) that could otherwise prevent the program from moving forward, and that can make a potential licensee more willing to have the next conversation.
Be careful what you budget for, though. Good Phase 2 data will often produce the larger uptick in valuation, and the gain from solving a CMC problem can look modest next to it. For an early-stage company, getting into that conversation still has value.
When is preclinical work the better investment?
The question I sometimes get is: I’m running a Phase 2 in one indication. Do I run a second Phase 2 somewhere else, or put that money into five animal studies? It’s not an easy question to answer, particularly where the animal models don’t correlate well with human disease. But a robust animal package that provides evidence supporting potential across multiple indications may be quite interesting to a prospective licensee, especially if they are willing to take on the risk associated with the first indication.
Who is the data package for?
A lot of misdirected spending comes from telling the wrong story to the wrong audience. I see plenty of companies whose presentations were built around great science, the management team and the Nobel laureate on the advisory board. That’s fine, and it may work for investors. They are backing a team as much as a molecule, and the credentials of the people running the program are a legitimate part of that judgment.
A licensee is doing something different. They are evaluating an asset they intend to develop with their own people, so the strength of your team is not what they are underwriting. Does the drug hit the target? Does it have the profile needed to become a real drug? Are there tox or manufacturing issues? And what other risks could they still be taking on? Those questions get answered by the data, not by the bios.
In other words, the investment was made on the basis of one set of parameters (management), while the licensee is looking for something very different (data). They are not necessarily the same thing. Great management does not automatically result in an intelligent drug development strategy.
Start with the commercial opportunity
All of this assumes there is something worth licensing in the first place. If I have one overarching message, this is it. None of the gains above will materialize if the commercial value was limited to begin with, and that’s usually the bigger problem. Strong clinical data, a solved CMC problem and a broad preclinical package can’t overcome an asset with limited commercial potential. The standard of care may have changed. A competitor may have moved ahead. The market may be smaller than expected, or the product may not offer a meaningful enough advantage over what patients already have.
So start with the commercial thesis, then work backward. What would a potential partner still need to believe? What is the biggest risk to the asset? What is the most efficient way to address it? What else is in development that can profoundly change how your target disease will be treated at the time of your projected launch?
Sometimes the answer is more Phase 2 data. In other cases it may be more CMC data, or a broader preclinical package, or a biomarker-defined patient subpopulation, or a definitively answered safety question. Sometimes, another study simply isn’t the best use of the capital. A study can be scientifically valuable without creating a value inflection. Maybe that capital should be invested in another candidate.
The most important question is whether the study addresses something that could change how a potential partner views the asset.
Working through what your next study needs to prove? Carlos is one of the experts you can engage through KreaConnect, KreaMedica’s expert matchmaking platform, connecting biotech teams with specialized, experienced experts based on their specific program needs and development stage. The goal is to bring the right expertise into the program at the right time, without the overhead of building it in-house.