The selection process involves analyzing the largest financial deals first – those with a minimum deal size of $300 million and a minimum upfront payment of $20 million. The next cut is driven by the accessibility of the contract: If neither party to the transaction filed the contract with the SEC, then the deal is out of the running.

That still leaves a large number of evaluable alliances, most of which are very similar in structure. So what made this year’s nominees stand out? Those that made the final cut have evolved beyond the 50/50 joint development, profit-sharing, and joint-decision making partnership of old. History has demonstrated that these deals can engender constant bickering over budgets, unhappiness, stalemate and even dissolution.

The Deloitte Recap analysts therefore looked for alliances that provided limits to shared costs, provisions to cover unanticipated expenses, hedges against huge pre-launch and launch costs (a simple royalty calculation vs. a share of operating profit), and a clear delineation of decision-making power.

Fifty/fifty cost-sharing deals have been all the rage for years, but even a $100 million upfront payment won’t go very far for a broad-spectrum cancer product entering Phase II and III trials, for instance. The biotech company’s share of the costs could easily escalate to $50 million-$100 million per year, burning straight through that upfront payment. So, the analysts looked for deals with some better form of cost allocation than a 50/50 split.

Protection against back-end profit-sharing is another element the analysts favored. Sharing development costs is one thing, but sharing operating profits (or lack thereof) is another. It is very common for pre-launch and launch costs (not to mention corporate overhead) to overwhelm near-term profits for large-market blockbuster-potential products. Thus, the analysts favor a tiered royalty structure, ensuring that the biotech company starts receiving revenue immediately after product launch.

Picking up on another favorite theme of biotech companies – co-promotion – the analysts looked for co-promotion terms where the pharma company finances or otherwise supports the biotech firm’s sales force. Co-promotion doesn’t do the biotech company much good if it is cannibalizing its profits by incurring substantial costs and long-term overhead to build and maintain a sales force that it may or may not be able to afford.

Finally, the analysts have noticed that biotech and pharma companies alike have tuned into the need for the allocation of decision-making power. All the joint cost-sharing, profit-sharing provisions simply leave the door open for arguments about spending and balancing the budget. Asking both parties to come to a consensus to resolve such disputes is simply prolonging the agony and very likely delaying development and launch.

Increasingly, today’s alliances address this issue. One partner may have the final say over development matters while the other has the final say over commercialization, for example. Another alliance may provide for a pre-named neutral third party to resolve certain disputes, avoiding a lengthy mediation or arbitration process.

Each of this year’s Deal of the Year nominees incorporates at least three of the four principles outlined above – and that’s what makes them “breakthrough” deals. They incorporate innovations that help today’s biotech companies meet their ambitions and fit better into their bigger shoes.

originally published 05/07/2010