Option Transactions in Today’s Market: Unlocking Maximum Value while Minimizing Risk

Author: Evan Tallmadge

Life sciences licensing partner Amanda Austin moderated Ropes & Gray’s annual “From the Boardroom” panel – held in San Francisco during the 2025 J.P. Morgan Healthcare Conference – which this year looked at how companies can use deals structured as an option to obtain an exclusive license or acquisition rights to pursue valuable collaborations and pipeline opportunities while achieving balance sheet objectives.

The panel – which featured Casarine Chong, Senior Vice President, Deputy General Counsel, Transactions, Bristol Myers Squibb, Chris Frankenfield, Chief Financial Officer and Chief Operating Officer, Xilio Therapeutics, John Mayfield, Senior Vice President of Business Development & Strategy, Flagship Pioneering, and Siobhan Pomeroy, Vice President, Corporate Development, Gilead Sciences, raised a number of points that will be of interest throughout 2025:

• Challenges in 2024 Driving Option Deals. There have been numerous challenges in 2024 that, throughout the life sciences industry, have required creativity to address, including pricing challenges from the IRA, increased challenges in obtaining antitrust clearance, and budgetary pressures from both a difficult public equity market environment as well as internal budgetary constraints within big pharma, all of which have made justifying entering into fulsome collaboration and license agreements more difficult. Option deals represent a different risk and economic balance than a collaboration and license agreement (or an asset or whole company acquisition), which is an important tool in the kit for both biotechs and big pharma.
• Option Structures Creating Synergies for Big Pharma. Given the scientific uncertainties arising from even highly promising modalities, big pharma strives to have more shots on goal in order to eventually obtain a commercial-stage product. Risk sharing with biotechs by utilizing option structures both shares the risk of partnering earlier stage assets as well as keeping the biotech and the key scientists there centrally involved in the development through the pre-clinical stages of development, where the biotech can bring its specialized expertise it has developed for the asset and underlying biology to the lab bench.
• Options as a Showcase for Biotech Capabilities. Option structures also represent opportunities for biotechs. Due to the lesser price tag and more bearable P&L hit for its partner, biotechs can use option deals to showcase opportunities and capabilities for a big pharma partner, leading to the opportunity for more robust collaborations down the line.  Having increased certainty of a big pharma partner for a program frees the biotech to focus on its core competency of being an innovative company without needing to develop the expertise to run late stage clinical trials or build out commercial capabilities, and to expend its limited capital on this innovation.
• Deal Structuring Considerations. Option deals are a trade off – early access for a lower fee than a typical license or acquisition agreement, and this colors how both big pharma and biotechs structure option deals. From the big pharma perspective, it is important to keep biotech management engaged and prioritizing the option program, while ensuring that the data package will contain sufficient information to make an informed decision as to whether to exercise the option. From the biotech side, acknowledging that there are many considerations as to whether the partner will exercise the option other than the science, including re-prioritization of therapeutic focus areas in big pharma, there is a focus on both providing the partner sufficient data to exercise the option and take the program forward while maintaining flexibility and runway to re-partner the asset if the option is not exercised.
• Governance. Preserving the option structure from a P&L perspective requires a relatively arms-length relationship between the biotech and big pharma, which makes the governance mechanics one of, if not the, most important operational consideration when negotiating the deal. A good governance structure and engaged alliance management teams facilitate a good communication pipeline between the biotech and big pharma partner throughout the entire course of development such that when the data package is delivered it meets both parties’ expectations, even if those expectations have shifted since the deal was signed (which is not unusual for any discovery-stage research program). The biotech providing a data read-out after a period of time with limited communication and interaction between the parties may not provide sufficient insight for the partner to get internal approvals to exercise the option, even if the underlying scientific data is strong – which neither benefits the biotech nor the big pharma partner.
• Timing. Option deals are no longer reserved for clinical stage assets. The panelists noted seeing a shift to early stage discovery deals, as both biotechs and big pharma partners are seeing the lower P&L hit afforded by option structure as an opportunity to have more pathways towards success, including deals focused on discovery of multiple target(s) and/or product(s). Option structures also facilitate dealmaking in uncertain times – upon option exercise the regulatory regime may be more certain or the background biology and manufacturing process may be more fully fleshed out, de-risking the program more than just advancing the program through development.
• Lessons Learned. Option conversations often open the door to conversations about a more engaged relationship, whether through turning the deal into a license and collaboration agreement or an acquisition agreement or facilitating more partnered programs between the biotech and the big pharma partner. Option deals come with their limitations, but are an important tool in the dealmakers playbook, especially for high-risk high-reward biology in competitive dealmaking environments at earlier stages of development, where the ability to investigate more programs with more partners outweighs the limitations of the option structure. From the biotech side, earlier partnering of one or more assets offers important validation for the company and is often seen as a pivotal point in the growth of the company, which option deals can facilitate.

There’s an expectation that many more companies will be looking at option structures to facilitate strategic partnerships in 2025. Option deals have their limitations, but provide an opportunity for both biotechs and big pharma partners to make deals happen for assets carrying a higher level of risk (whether due to clinical stage, mechanism of action or modality, etc.) along with a great deal of promise.