When Eyeing Small Biotechs, Partnerships Are Huge

In Tuesday's column, we explored the traits I look for before taking a stake in an attractive but speculative small-cap biotech concern. We also talked about how important it is to make myriad small investments across this lucrative but highly volatile space. The truth is that most new compounds fail along the development process, so it is critical not put all your eggs in one or even several baskets. This is also why it is important before buying a stock in this area that the company has several compounds in development. These multiple shots on goal help mitigate risk and provide more chances of success. Other selection criteria in the small-cap biotech space should include a strong balance sheet and an intriguing and evolving pipeline. Insider buying is always a nice thing to see as well. One of the most critical things I look for when I am making or increasing my stake in one of these small, promising concerns is whether it has any partnerships with larger players in the industry. The existence of key collaboration deals with deeper-pocketed concerns does several things that improve the odds of investment success. A transaction like this can validate the value of the smaller company's underlying assets and technology. It usually also delivers much-needed financing to develop these new compounds, which means the smaller firm is less likely to need to tap the secondary markets to raise more money for development. Finally, a larger firm can provide expertise in navigating the development and approval process -- and also can deliver a global marketing and distribution network should that new compound be approved. I would like to highlight a couple of small-cap biotech companies I have profiled before but that became more attractive recently due to collaboration deals with major firms within the industry. AVEO Pharmaceuticals (AVEO) has returned more than 50% since I first profiled it last November. Early this week the company entered into an exclusive worldwide license with giant Novartis (NVS) for the development and commercialization of AV-380, AVEO's humanized inhibitory antibody targeting growth differentiation factor 15 (GDF15), and related antibodies. AVEO will receive an upfront payment of $15 million, potential milestones totaling more than $300 million and tiered royalties from the high single digits to low double digits. Novartis will be responsible for all clinical development, manufacturing and commercialization activities and costs. This deal could be huge over the long term for this small concern, given the company has a market capitalization of about $85 million currently. I last touched on Inovio Pharmaceuticals (INO) in depth in early May. Last week, the company signed a significant collaboration deal with MedImmune, a subsidiary of giant pharma firm AstraZeneca (AZN). The new deal will provide $27.5 million to Inovio to develop jointly an experimental immunotherapy called INO-3112, which currently is focused on cancers caused by human papillomavirus (HPV) types 16 and 18. These two HPV types are responsible for more than 70% of cervical cancer. More importantly, the deal with MedImmune could provide $700 million in potential milestone payments. Roughly half of those potential payments would be targeted at development financing, with the rest going directly to Inovio. In addition, the deal will provide Inovio up to double-digit tiered royalties if INO-3112 eventually results in commercial sales. Both companies are still on the speculative side, but recent deals make their investment case all the more positive.

When Eyeing Small Biotechs, Partnerships Are Huge

Key collaboration deals with deeper-pocketed concerns can improve the odds of investment success.

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