Five Prime's decision to focus on the long-term pays off

Tuesday, 25-November-2014

Five Prime Therapeutics (Nasdaq: FPRX) climbed over 30 percent yesterday after announcing they signed a new collaboration with Bristol-Myers Squibb (NYSE: BMY).  The two companies will run a study of Five Prime’s FPA008, an anti-CSF1R candidate, in combination with Bristol’s highly regarded checkpoint inhibitor, nivolumab, against six tumor types.  Bristol will pay Five Prime $30 million up front, and will cover the cost of the study.

 

As was reflected in Five Prime’s stock yesterday, for Bristol to choose them as a partner on this is a very nice coup.  Imagine the number of companies who would love to have a chance to do a combo with something as exciting as nivolumab.  When it comes to immuno-oncology, you could not ask for a better partner than Bristol, or a more promising asset than nivolumab.

 

One of the neat things about the deal is the way Five Prime likely landed it.  This is some guesswork on my part, but here is a quick personal anecdote that suggests the deal came together in part due to Five Prime putting their long-term interests ahead of short-term gains.  It is a good lesson that other small companies can learn from.

 

This spring I attended an investment conference in New York where Five Prime CEO Lewis “Rusty” Williams was presenting for his company.  This was taking place shortly after Five Prime signed a previous collaboration with Bristol to develop assets for two new checkpoint pathways Five Prime has discovered.  For that deal, Bristol paid Five Prime $20 million up front, made a $21 million equity investment in the company, and also agreed to pay $9.5 million in R&D expenses.  Otherwise, it was a very back-end loaded deal with large potential future milestones and royalties.

 

At the conference, I briefly bumped into Dr. Williams and told him congratulations on landing the deal, and that I thought Bristol would be a great partner to work with.  Not knowing him or Five Prime very well, it was what he told me next that really gained my respect, and motivated me to look at Five Prime more closely as a possible investment. 

 

Dr. Williams told me they were excited about the deal too, but he also mentioned how Five Prime could have actually chosen to partner with other companies for a higher upfront payment.  However, he thought the smarter move was to go with Bristol since they, along with Merck, are out in front as THE leader in the development of checkpoints.  He went on to say how the knowledge Five Prime would gain from working with a company like that would far outweigh any cash a lesser company could give them.  Smart move!

 

This might sound like an easy decision, but it is not necessarily the case for a small company.  Young biotech companies are always cash-starved, and it is very tempting to take the larger cash deal now when you are in that position.  The fact that Five Prime was of the mindset to put their long-term interests over short-term gain is very impressive.  I am a long-term investor myself, and this is exactly the type of intangible I like to look for in a company.  Always remember that patience is a virtue.  You want to find people to invest in who live by it and know how to plan for the long-term.  After I heard Dr. Williams speak that day, I knew Five Prime had its priorities in the right place.

 

All of this leads back to yesterday’s big news.  I am guessing their decision back then probably directly led to this new deal.  It is just speculation on my part, but had Five Prime taken the cash and signed with someone else earlier, I doubt they would now have the chance to do this exciting nivolumab collaboration.  In other words, the decision to forego a quick buck and instead focus on working with the most capable partner is already paying off in spades.

 

The moral of the story for other small biotechs is this:  always put your company’s long-term interests first, focus on doing the best science with the best partners, and you will likely find yourself much better off in the end.

Who Am I?

I'm an individual investor from Kansas City.  My focus is on biotech stocks, but I enjoy investing in all industries. I'm an old-school, buy and hold investor who believes the best way to outperform and grow capital is to own innovative companies with good management teams over the long-term. more>>

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