Strategic Partnerships & Alternative Funding: The New Biotech Playbook

The Old Model Is Broken: Traditional licensing deals followed predictable patterns: biotech discovers molecule, pharma licenses rights for upfront payment plus milestones and royalties, biotech hands off development responsibility. This transactional approach worked when capital flowed freely and biotechs could fund early development independently. But 2025's reality—venture scarcity, extended development timelines, escalating costs—demands more sophisticated structures.

Integrated Development Partnerships: Modern partnerships increasingly feature shared decision-making, joint development teams, and aligned economic incentives. Analysis from PharmaIntel reveals that 63% of new deals in 2024 included shared development responsibilities, compared to just 38% three years earlier. These integrated structures allow biotechs to retain strategic control while accessing pharma expertise in clinical operations, regulatory strategy, and commercial planning.

The Merck-Moderna Model: Their personalized cancer vaccine partnership exemplifies next-generation collaboration. Rather than traditional licensing, Merck and Moderna created jointly managed development infrastructure with 50/50 cost-sharing and equal profit distribution in major markets. Both companies maintain equal representation in governance committees making critical go/no-go decisions. This structure ensures neither party can deprioritize the program and creates genuine partnership rather than vendor-customer dynamics.

Why Pharma Embraces Integration: Large pharmaceutical companies face their own pressures: looming patent cliffs (biologics losing exclusivity represent $300B in at-risk revenue through 2028), declining R&D productivity, and need for external innovation. More than 70% of new molecular entity revenues now come from externally sourced products. Integrated partnerships allow pharma to access cutting-edge science while maintaining strategic optionality and managing portfolio risk through co-investment rather than full acquisition.

Unprecedented Deal Flow: Chinese biotech in-licensing exploded in 2024-2025, accounting for over 30% of all assets licensed by major pharmaceutical companies. This represents a fundamental shift in global innovation geography—China emerging not merely as low-cost manufacturing hub but as legitimate source of novel, clinically validated therapeutics with best-in-class potential.

What's Driving The Surge: Chinese biotechs can advance programs from IND filing to early clinical data at 40-60% lower cost than U.S. counterparts, with significantly faster regulatory timelines through China's NMPA. This efficiency creates attractive risk-return profiles for Western pharma: license clinical-stage assets with Phase 1/2 data de-risking early development, pay compressed valuations reflecting China's challenging domestic market, then conduct pivotal Western trials for global commercialization.

Marquee Deals Illustrating The Trend:

• Merck-Hansoh ($2B total value): Merck secured global rights to HS-10535, an oral GLP-1 receptor agonist for obesity, capitalizing on validated target biology and China's accelerated GLP-1 development ecosystem
• Novartis-Shanghai Argo ($4.1B potential): Multi-program deal giving Novartis access to RNAi platform-derived cardiovascular assets, reflecting confidence in China's platform technology capabilities
• AstraZeneca-Harbour BioMed ($4.4B potential): Option to license multiple programs from Harbour Mice antibody platform, with $175M upfront demonstrating willingness to invest in Chinese platform technologies
• Summit Therapeutics-Akeso: Licensed ivonescimab (PD-1/VEGF bispecific) which subsequently outperformed Keytruda in head-to-head NSCLC trial—validating quality of China-originated innovation

Therapeutic Focus Areas: Chinese biotech licensing concentrates in oncology (particularly antibody-drug conjugates and bispecifics), metabolic disease (GLP-1 agonists and related mechanisms), and immunology. Approximately 85% of ADC and bispecific antibody clinical pipelines involve Chinese-originated or China-partnered programs. This concentration reflects China's strategic focus on biologics and its technical sophistication in complex antibody engineering.

Risks and Considerations: Despite attractive economics, China licensing carries unique challenges. Regulatory risks include historical issues with clinical trial diversity requiring Western Phase 3 programs. Legislative uncertainty around BIOSECURE Act—proposed U.S. legislation restricting use of Chinese CDMOs designated as "foreign adversaries"—creates manufacturing supply chain concerns. Tariff pressures and geopolitical tensions add complexity to deal structuring and long-term partnership stability.

Power Dynamics Have Shifted: The balance in partnership negotiations has tilted decisively toward pharmaceutical companies. Data from J.P. Morgan's licensing reports reveals that upfront payments—guaranteed cash biotechs receive at deal signing—have collapsed from 12-13% of total deal value in 2019-2020 to just 6% in the first half of 2024. This compression reflects pharma's strengthened position: abundant capital reserves, cautious deployment strategies, and expanded option sets from proliferating biotech assets globally.

Why Biotechs Accept Worse Terms: Faced with venture scarcity, closed IPO windows, and cash runway pressure, biotechs lack negotiating leverage. The alternative to accepting pharma's terms isn't better terms elsewhere—it's often program termination or company wind-down. "The reality these days is that it really takes scrappy leadership teams and boards to find creative ways to keep these companies going," explained a Leerink Partners managing director.

Milestone Backloading Increases Risk: Reduced upfront payments mean biotechs shoulder more development risk while waiting years for milestone achievements. If programs fail in Phase 2 or 3, biotechs receive no additional capital beyond initial modest payments. This structure effectively transfers clinical risk from pharma to already capital-constrained biotechs—the opposite of historical partnership economics designed to share risk.

Competition Intensifies Downward Pressure: Pharma partners now choose among broader asset pools. More Chinese biotechs offering clinical-stage candidates creates competitive pressure on U.S. biotechs. Increased availability of late-stage assets (as VCs concentrate capital in fewer, larger rounds) means pharma can be highly selective. Economic principles apply: supply expansion without corresponding demand growth depresses prices—in this case, licensing terms.

The Basic Structure: In royalty financing, investors provide upfront cash to biotechs in exchange for percentage of future product revenues. Unlike equity, founders don't dilute ownership. Unlike debt, there's no fixed repayment schedule or default risk if products fail. The investor's return depends entirely on commercial success—if products generate revenue, investor receives contractual percentage until reaching agreed return threshold (typically 2-3x invested capital).

Two Main Transaction Types:

• Synthetic Royalties: Company creates new revenue stream by selling percentage of future product sales directly to royalty investor. No existing royalty obligation exists—company synthetically creates one. These transactions are most common and provide maximum flexibility.
• Royalty Monetization: Company already receives royalties from out-licensed products (e.g., university received royalties from pharma commercializing university-discovered drug). Company sells these existing royalty streams to investor for present-value lump sum. Universities and research institutions commonly use this structure.

Why It's Growing: Multiple factors drive royalty financing adoption. Biotech valuations have compressed 30-50% from 2021 peaks, making equity dilutive at depressed prices. IPO markets remain selective with only 18 public offerings through October 2025. Companies nearing commercialization need capital for launch but can't afford equity dilution at low valuations. Royalty financing provides "smart capital" that doesn't require Board seats or governance rights.

Typical Deal Economics: Average H1 2025 transaction size was $226M with upfront payments averaging $115M (down from $161M in 2024 as market becomes more competitive). Royalty rates typically range 2-8% depending on revenue timing, market size, and competitive landscape. Investors target 2-3x cash-on-cash returns over 7-10 years. Deals often include revenue floors and escalating royalty rates as products achieve blockbuster status.

Traditional Dominant Players: Three firms—Royalty Pharma, HealthCare Royalty Partners, and Blackstone Life Sciences—historically comprised 70-80% of royalty financing volume. These specialized funds pioneered the asset class and maintain largest capital pools (Royalty Pharma manages $30B+ across public and private vehicles). Their deep expertise in asset evaluation, revenue forecasting, and portfolio construction provides competitive advantages in deal sourcing and pricing.

Market Expansion and New Entrants: The royalty space has democratized significantly. Numerous new funds launched in 2023-2025 including BioPalace (platform connecting biotechs with accredited investors), Oberland Capital, and private credit funds expanding into healthcare. This expansion creates more competitive pricing benefiting biotechs seeking capital. However, newer entrants may lack deep technical expertise for thorough diligence, potentially mispricing risk.

Corporate and Institutional Interest: Pension funds, sovereign wealth funds, and insurance companies increasingly allocate to royalty financing given attractive risk-return profiles uncorrelated with broader markets. Corporate investors including pharma companies and family offices deploy capital seeking healthcare exposure without operational responsibilities. Some estimates suggest $14 billion in annual royalty transaction capacity from expanding investor base.

When Royalty Financing Makes Sense: Optimal scenarios include late-stage assets with clear commercialization paths (Phase 3 trials complete or near completion), depressed equity valuations making dilution extremely expensive, near-term catalysts (FDA approval, partnership) where modest capital bridges to value-inflection point, and management teams wanting to preserve equity upside while securing non-dilutive funding.

Trade-offs and Risks: Royalty financing isn't free money. Companies permanently reduce future product margins by contractual royalty obligations. If products become blockbusters, royalty investors capture significant economic value that would otherwise flow to shareholders. Additionally, royalty agreements often include restrictive covenants limiting future financing flexibility, change-of-control provisions complicating M&A exits, and potential conflicts if company struggles to pay royalties during commercial ramp-up.

Due Diligence Intensity: Royalty investors conduct exhaustive analysis before committing capital: detailed revenue forecasting based on epidemiology, market dynamics, pricing assumptions, and competitive landscape; clinical and regulatory risk assessment evaluating approval probability and label scope; commercial diligence on payer coverage, physician adoption, and sales force capabilities; and legal review of IP estate, licensing agreements, and potential third-party royalty obligations.

Negotiating Key Terms: Critical terms biotechs must negotiate carefully include royalty rate (lower is better but impacts deal size), revenue floor triggering royalty payments (allows modest sales without obligation), cap on total payments to investor (2-3x invested capital typical), and territory scope (worldwide versus specific geographies). Companies should also negotiate flexibility for future financings and M&A transactions without onerous consent requirements.

What Are ATM Programs: At-the-market offerings allow public biotechs to sell shares gradually into the market at prevailing prices rather than traditional overnight offerings at fixed prices. Companies establish ATM programs (typically $50-200M in size) with investment banks as agents, then sell shares opportunistically when stock price performs well or ahead of positive catalysts.

Advantages Over Traditional Offerings: ATM programs minimize market impact by dribbling shares out over days or weeks rather than flooding market with large block. Companies access capital flexibility—drawing down when needed rather than raising capital prematurely. Lower transaction costs (2-3% commission versus 5-7% for traditional underwritten offerings) preserve capital efficiency. Management maintains control over timing and pricing rather than being subject to underwriter discretion.

When ATMs Work Well: Most effective for companies with consistent positive newsflow maintaining upward stock price trajectory. Clinical-stage biotechs reporting strong trial data can capitalize on momentum by selling into strength. Companies with demonstrated ability to reach milestones establish credibility with investors accepting modest dilution in exchange for de-risked execution.

Limitations and Risks: ATMs require adequate daily trading volume (typically $2-5M minimum) to absorb selling without depressing price. Programs can depress stock if market perceives overhang from continuous selling. Companies must maintain registration statement effectiveness and comply with SEC regulations. Most importantly, ATMs only work for already-public companies, providing no benefit to private biotechs seeking capital.

The Venture Debt Model: Specialized lenders (Silicon Valley Bank historically, now Oxford Finance, Horizon Technology Finance, Hercules Capital) provide term loans to VC-backed companies, typically 20-40% of most recent equity round size. Loans carry interest rates of 8-12% and 3-4 year terms, with interest-only periods followed by principal amortization. Lenders also receive warrants for equity upside (5-15% warrant coverage).

Strategic Use Cases: Venture debt extends runway between equity rounds, allowing companies to reach additional milestones before next financing. Bridge financing covering unexpected costs or trial delays prevents emergency fundraising at disadvantageous terms. Equipment financing funds capital expenditures (manufacturing equipment, lab build-outs) preserving equity capital for operations. Growth capital accelerates commercial expansion or clinical programs without immediate equity dilution.

Underappreciated Risks: Debt service obligations increase monthly cash burn by 10-20%, ironically shortening runway if milestones slip. Covenants restricting additional financing, asset sales, or business changes can handcuff management flexibility. Default provisions give lenders security interests in company assets, potentially forcing fire sales if companies struggle. Most concerning: venture debt only makes sense if company expects to raise subsequent equity round—if that round doesn't materialize, debt accelerates insolvency rather than preventing it.

Market Dynamics in 2025: Venture debt availability has contracted following Silicon Valley Bank's collapse in 2023. Remaining lenders have tightened underwriting standards, focusing on later-stage companies with clear paths to profitability or acquisition. Pricing has increased (interest rates up 100-200 basis points) and warrant coverage expanded as lenders demand better risk-adjusted returns. Early-stage biotechs find venture debt increasingly inaccessible without strong VC sponsor support.

Milestone-Based Financing: Rather than providing full capital upfront, investors commit to tranched releases tied to specific development achievements. Structure reduces investor risk while ensuring companies receive capital to progress. Typical milestones include IND filing acceptance, first patient dosed in clinical trial, interim data readout, regulatory submission, and approval. Each milestone triggers capital release (e.g., $10M per milestone across five milestones for $50M total raise).

Contingent Value Rights (CVRs): Companies issue CVRs to existing shareholders when raising capital at valuations below previous rounds (down rounds). CVRs represent contractual rights to future payments if specific events occur (successful clinical trial, FDA approval, acquisition above threshold price). This structure allows companies to raise capital at current depressed valuations while compensating existing investors for dilution if company subsequently succeeds. CVRs bridge valuation gaps between what companies believe they're worth and what new investors will pay.

Participating Preferred Stock: Beyond standard liquidation preferences, participating preferred gives investors first claim on proceeds in exit scenario PLUS pro-rata share of remaining proceeds alongside common stockholders. This "double-dip" structure protects investors in both downside scenarios (getting money back first) and upside scenarios (participating in gains). Structure is increasingly common in late-stage rounds where investors face significant execution risk but companies need capital urgently.

Structured Equity with Ratchets: Anti-dilution protection with full-ratchet provisions adjusts investors' effective price if company raises subsequent rounds at lower valuations. For example, Series C investor at $10/share gets repriced to $6/share if Series D occurs at $6/share, receiving additional shares to maintain investment value. These provisions protect investors but can severely dilute founders and employees if downward valuation spirals occur. Companies desperate for capital accept these terms, but they create problematic incentive structures.

Know Your Alternatives: According to partnership advisors at PharmaIntel, biotechs with multiple interested pharma partners secure 35-50% better terms than those negotiating with single potential partner. Even in difficult markets, companies should cultivate parallel discussions with 3-5 potential partners to create competitive tension. "The worst negotiating position is having to say yes to whatever terms are offered because you have no other options," notes one advisor.

Data Creates Leverage: Companies with clinical proof-of-concept (POC) data command dramatically better terms than earlier-stage assets. Analysis of 2024 licensing deals shows POC-positive assets secured median upfront payments of $75M versus $25M for pre-POC programs. The data quality matters too: well-designed studies with clear endpoints, appropriate comparators, and statistical rigor drive valuation premiums of 40-60% over ambiguous or poorly designed trials.

Geography and Indication Strategy: Rather than seeking worldwide exclusive rights partnerships, biotechs can maximize value by structuring geography- or indication-specific deals. License North American rights to one pharma, European rights to another, and retain Asian rights for separate partnership or internal development. Precision oncology companies might license solid tumors to one partner while retaining hematological malignancies. This unbundling strategy requires more management bandwidth but can generate 2-3x total deal value versus single worldwide exclusive partnership.

Evergreen Options Without Commitment: Avoid partnership structures where pharma receives lengthy option periods (18-24+ months) to evaluate assets before making licensing decision. During option period, pharma has exclusive access but no obligation to advance or fund development. These "free look" structures tie up assets while pharma pursues internal competitive programs. If opting agreements are necessary, negotiate tight timelines (6-12 months maximum), substantial option exercise fees, and clear development obligations during option period.

Overly Broad Rights Without Adequate Compensation: Some partnerships grant pharma rights to entire platform technology, all future derivatives, or broad therapeutic territories for inadequate compensation. Companies should carefully delineate what's included versus excluded from partnership scope. Future improvements to licensed technology should require additional payments. Platform deals should include per-program milestone and royalty structures rather than single lump-sum covering unlimited applications.

Governance Without True Partnership: Joint steering committees should have meaningful decision-making authority with clear escalation procedures for resolving deadlocks. Avoid governance structures where pharma has final say on all material decisions—this eliminates partnership benefits of diverse perspective and shared commitment. Better structures use third-party arbitration, mediators, or clearly defined decision domains where each party has authority.

Inadequate Clinical Milestone Definitions: Poorly defined milestone language creates payment disputes. Milestones should specify: exact triggering event (first patient dosed, database lock, topline results press release), which indications and geographies count toward milestone achievement, whether milestone payments are product-specific or program-wide, and timeline for payment after milestone achievement. Ambiguity benefits the party with deeper pockets to litigate—usually pharma.

What Pharma Actually Wants: Corporate development executives consistently prioritize several characteristics: clinical proof-of-concept data from well-designed studies, clear competitive differentiation (not me-too assets), intellectual property with composition-of-matter coverage extending past 2035, addressable markets exceeding $2B peak sales potential, and management teams with track records of successful development and regulatory interactions.

Therapeutic Area Priorities Shifting: While oncology remains dominant category for deals, corporate development focus is expanding to metabolic disease (especially obesity and cardiovascular), immunology and inflammation (particularly oral small molecules), rare genetic diseases with clear genetic validation, and CNS disorders with biomarker-selected patient populations. Pharma companies are notably cooling on modality platforms (gene therapy, cell therapy) without specific product candidates demonstrating clinical efficacy.

The Quiet Period Phenomenon: Many pharma companies implement "quiet periods" 4-6 weeks before major industry conferences (JP Morgan, ASCO, ASH) where they slow business development activities to preserve conference excitement. Biotechs should time partnership outreach accordingly—best windows are 2-3 months before conferences (when pharma wants deals to announce) and 4-6 weeks after conferences (when attention returns to business development).

Both biotechs and pharma increasingly prioritize capital-efficient development strategies. For biotechs, partnerships provide development funding and pharma expertise without burning equity capital. For pharma, in-licensing late-stage assets reduces internal R&D costs and risk while accessing external innovation. This mutual interest in capital efficiency drives partnership volume higher even as overall funding contracts.

The numbers validate the trend: pharmaceutical companies now source 70%+ of new molecular entity revenues from externally developed products versus internal discovery. Rather than spending $1-2B developing assets internally, pharma pays $100-300M to in-license clinical-stage programs with validated biology and preliminary efficacy data. Biotechs conducting earlier-stage development at lower burn rates create win-win economics.

Major pharmaceutical companies face unprecedented patent cliffs through 2030. Biologics losing exclusivity represent approximately $300B in at-risk annual revenue, with 2025-2028 seeing particularly acute cliff concentration. Blockbusters going off-patent include Humira (already genericized), Keytruda (2028), Eliquis (2026), and numerous smaller brands.

This revenue loss creates urgency for business development teams to refill pipelines. Pharma BD groups received increased budgets and headcount in 2024-2025 with mandates to secure assets replacing lost revenue. The competitive dynamic benefits biotechs with differentiated late-stage assets—multiple pharma companies bidding for same programs drives valuations higher and improves deal terms despite overall market weakness.

China's biotech sector faces domestic challenges: slowing economic growth, reduced domestic healthcare spending, regulatory complexity, and geopolitical tensions. These pressures create valuation discounts for Chinese biotechs relative to U.S. counterparts—despite often having comparable or superior clinical data. Western pharma and biotech capitalize on this disconnect by in-licensing Chinese assets at attractive terms.

The dynamic benefits all parties: Chinese biotechs secure Western partnerships providing validation, capital, and regulatory expertise for global development. Western partners access high-quality assets at compressed valuations with significant clinical de-risking already completed. Patients globally benefit from accelerated development of novel therapeutics. However, geopolitical risks remain wild card potentially disrupting these mutually beneficial arrangements.

Answer: Consider partnerships when you have clinical proof-of-concept data generating pharma interest, equity valuations have compressed making dilution extremely expensive, runway is limited (less than 12-18 months) creating urgency, or development/commercialization costs exceed realistic VC funding capacity. Continue pursuing VC funding when assets remain early-stage without clinical validation, multiple parallel programs exist where partnership would limit strategic flexibility, or equity valuations remain attractive relative to partnership economics. Many companies pursue dual tracks—seeking both partnerships and equity to maintain negotiating leverage and optionality.

Answer: Accepting the first term sheet without creating competitive tension. Even in difficult markets, companies should cultivate relationships with 3-5 potential partners before entering formal negotiations. Having multiple interested parties dramatically improves terms—one advisor estimated 35-50% better economics for competitive versus sole-source negotiations. Other common mistakes include inadequately defining milestone triggers (creating payment disputes), giving too-broad rights without adequate compensation, and agreeing to lengthy option periods without substantial option fees.

Answer: Generally no. Royalty financing works best for late-stage assets (Phase 3 complete or in progress) with clear paths to commercialization and substantial revenue forecasts. Early-stage companies lack revenue visibility for investors to underwrite deals, and would need to pay prohibitively high effective royalty rates reflecting development risk. Early-stage biotechs should pursue equity financing, grants, partnerships, or venture debt rather than royalty structures. Exceptions exist for university spinouts monetizing existing royalty streams from previously out-licensed technologies.