Does commercialization strategy affect return on equity?

Choosing a commercialization strategy around commercial rights retention is a critical decision for emerging biopharma companies, as it can inflect equity value during the development cycle. Historically, companies have made choices in this area based on perceived external perceptions of specific strategies or actions. Our team at ZS wanted to better understand how these choices affected equity value, and whether there exists a clearer picture of the trade-off between near-term equity impact and long-term value.

In 2019, ZS evaluated 72 first launches in the U.S. to understand how to best approach commercialization strategy. Subsequently, our team recently examined the same set of 72 U.S.-listed biotech companies and measured the effect of their U.S. commercialization strategies on their near-term stock price and their long-term mergers and acquisitions (M&A) opportunities between 2011-2020. We focused on three different types of launch strategies:

• Go-it-alone: Companies that launched themselves
• Co-promote: Companies that co-promoted their launch with a partner
• Out-license: Companies that licensed their launch work to others

To assess near-term return on equity, we compared company stock prices before and after launch or partnership deals with the S&P 500 biotechnology index. We did this across three time periods: pre-launch or pre-deal; post-launch; and post-deal.

Data show that an out-licensing strategy appears to provide the strongest equity performance (see Figure 1). This strategy captured more value by securing milestone and royalty payments up front, and it allowed the companies that employed this strategy to outperform their go-it-alone competitors in the first 12-18 months in terms of equity returns. However, companies that held commercial rights later made up for near-term underperformance and sometimes brought in more value through M&A via deal premiums.

ZS assessed the deal premium of these companies by comparing the stock price premium prior to the deal announcement with the stock price one day after the announcement. We found go-it-alone ventures may underperform in the near term but can later secure a higher premium than out-license companies (see Figure 2). Eventually, long-term value accretes as the go-it-alone ventures and their development programs mature—though it may take time to realize this value unless there is a transaction or successful exit.

Regardless of the time periods we analyzed, go-it-alone companies have consistently maintained higher premiums than co-promote and out-license first launchers (see Figure 2). The highest-acquisition premiums occurred in the lead up to the 2021-2022 market correction.

Deal size is a critical part of the M&A equation. Our research shows commercialization strategy does not necessarily drive deal size—instead, the size and characteristics of the entities are more significant drivers. Go-it-alone companies are usually smaller takeovers ranging anywhere between $500 million and $3 billion, while co-promote deals tend to be massive. On average, co-promote deals are twice the value of go-it-alone ventures and seven times as large as out-licensing deals. This is because they are inherently larger ventures with blockbuster assets and multiple programs in development. Some co-promote examples include Medivation, which developed Xtandi and Talzenna, or Pharmacyclics, which developed Imbruvica.

When we examined near-term stock performance, we found several common inherent attributes among over-performers. Therapy area is one key contributor, and companies that developed assets in high unmet need areas such as oncology and rare disease generally performed well post-launch. Additionally, companies that launched rare and oncology assets were more likely to outperform the index if they retained commercial rights by pursuing a go-it-alone or co-promote strategy—not to mention they could have also benefited from a bull market. For instance, Sarepta Therapeutics, Spark Therapeutics and Ultragenyx Pharmaceutical stocks all offered positive returns 12 months and 18 months after their respective launches. These companies operate in the rare disease space with multiple assets in the pipeline, and they all chose to launch alone because their novel assets were the first FDA-approved treatments in their respective therapeutic areas.

In addition, clinical results and a strong pipeline ensure future portfolio benefits and long-term value creation. Out-licensing and go-it-alone entities with strong pipelines tend to outperform the S&P biotech index, while stocks that hinged on a single drug tend to underperform post-launch regardless of strategy. And unsurprisingly, the market also rewards companies in the short term that have strong clinical results.

Some other factors to consider when planning a commercial strategy include:

Fundraising and launch expenses: One of the key considerations for commercialization strategy is raising capital to support launch activities, given that most first-time launch companies have a limited budget. If different commercialization strategies required various levels of investment, that may dictate the choice of strategy. We assessed publicly available cumulative fundraising data from 34 U.S.-based companies and found that the market has consistently funded launch activities across strategies as needed. For example, it may seem intuitive that co-promote biotech companies should have higher launch costs after factoring in a partner, but we found the total funds raised actually corrects downward to what is needed for the half or portion at first launch. The launch expense was on an even keel, meaning funding requirements should not drive strategy (see Figure 4).

Follow-on equity offerings: We assessed follow-on stock offerings for 51 companies and measured their change in stock price 12 months before the fundraising date. Each raise was classified as dilutive, non-dilutive or neutral. Follow-on equity offerings were largely non-dilutive across strategies, allowing companies to take advantage of higher stock prices when issuing follow-on offerings. Go-it-alone companies fared a little better as fewer companies raised capital at dilutive stock prices.

Given the risks and trade-offs of one commercial strategy over another, first launchers need to carefully evaluate what their goals are before taking a call—both in short and long term. The timing trade-off is most critical to achieving the goal, as the near-term accretion you’re giving away could be higher—though exit potential and long-term growth could effectively deliver higher returns years down the road. This is especially true for companies operating in high-unmet-need-rare and oncology therapeutic areas.