George Budwell: One way to offset the cost of expensive clinical trials, and retain a healthy relationship with shareholders to boot, is to perform manufacturing services for larger pharma companies. Generic drugmaker IGI Laboratories(NASDAQ:TLGT), for example, has been able to keep its share count at reasonable levels -- while building out its own product portfolio -- by manufacturing products for other drugmakers.
While this practice hasn't completely enabled IGI to avoid dilution, its present share count of roughly 53 million on a fully diluted basis is far below many of its peers in terms of market cap and developmental stage. On the back of its manufacturing services business, IGI has been able to launch four topical generic pharmaceutical products in the last two years, resulting in an astonishing 675% rise in share price.
The fundamental problem, though, is that few clinical-stage biopharmas actually have the facilities to manufacture drugs on a commercial scale. Even so, IGI's example shows that the capability to offer such services can help keep dilution in check until the clinical side of the business gets off the ground.
Cheryl Swanson: No one likes to see their stock ownership watered down -- that's just a fact. It happens all the time, however, with cash-burning biotechs. The ownership percentage of current shareholders is often ground down by badly timed or excessively dilutive raises of capital.
That's where licensing promising drugs to big pharma partners comes in. A great example of this is the deal just struck between Bristol-Myers Squibb and baby biotech Five Prime Therapeutics. Bristol is handing over $30 million and paying for a Phase I study on an antibody that could make a difference in a range of cancers.
In the best-case scenario, the powerhouse partner brings not only drug development expertise, but the regulatory and marketing skills necessary to turn novel discoveries into successful products.
In the worst-case scenario, the desperate-for-cash biotech sells off a high-potential candidate for a royalty stream representing a small fraction of future sales.
Most deals these days are collaborative, however, including the Bristol-Myers-Five Prime agreement.
When future economics are preserved, licensing deals make a lot of sense. After all, it's often not the size of your slice of the pie, but rather the size of the pie that matters.
Brian Orelli: It's possible for companies to get free money through grants from the nonprofit organizations, but the money from nonprofits is increasingly coming with some strings attached. Nonprofits often want to share in the upside -- typically in the form of a royalty -- if drugs they help fund make it to the market.
From a company perspective, a few percentage points of sales are worth foregoing if they are going to come out ahead compared to funding the entire project without help. If the drug fails in the clinic, the partnerships typically don't require companies to pay back funds contributed by the nonprofits.
In some ways, deals with nonprofit organizations aren't that much different than Cheryl's idea of licensing drugs to larger drugmakers. But it's possible for companies to get funding from nonprofits for smaller indications that large pharmaceutical companies might not be interested in.
In addition to contributing money toward the development of the drug, having a partnership with a nonprofit focused on an orphan disease can help in recruiting patients for clinical trials and give the company easier access to experts in the field.
The only real downside is those royalty payments, which can be substantial when the drugs are successful. The Cystic Fibrosis Foundation, for example, recently sold its royalties on Vertex Pharmaceuticals' cystic fibrosis drugs for $3.3 billion. Royalty Pharma, which bought the rights from the Cystic Fibrosis Foundation, clearly thinks the Vertex's royalty payments will add up to considerably more than that over the drugs' lifetimes.
George, Cheryl, and Brian do not have positions in the companies mentioned. The Motley Fool recommends Vertex Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.