I started thinking about my own risks yesterday, and I often find it helpful to write down my thoughts so I can refer back to them if needed. To my delight, I noticed that several others have already shared their thoughts on the platform. Excellent!
Drug development is an exceptionally risky field, and it’s absolutely true that most development projects never reach the market. I am especially grateful to @Pohjolan_Eka and @Clark_kent, who share a somewhat brutally realistic picture of the industry, the company, or at least the risks. In my opinion, this is an essential part of forming a complete picture, especially in such a high-risk and high-potential field. My own expertise is not enough to identify all risks, or at least to evaluate them. I can form some kind of estimates, calculate probabilities for upcoming events, and assess the market and its sentiment. Still, I invest, follow, and strive to learn. Occasionally, I am bothered by overly optimistic views, especially if they are not justified. I also notice that I sometimes think too optimistically myself, even though my experiences have shown that it is usually wiser to be a little more pessimistic and suspicious.
In the case of this company, it feels like there are plenty of twists and turns, and the next event almost always has some unexpected (awkward) detail whose existence I didn’t even know about. When assessing risks, one should therefore also consider the risk factor of unsystematic risk - the unknown unknown. Things that one could not predict or even imagine happening until they did. A pessimistic perspective highlights critical uncertainties, from clinical trial failures to financing challenges or competitors’ advancements. These views do not detract from anyone, nor do they diminish the company’s probability of success. On the contrary - critical scrutiny can also compel and pressure the company to be more open or to prepare for concerns raised by owners. Constructive criticism can also awaken the company itself to notice its own blind spots.
Excessive optimism can lead to over-investment or underestimation of risks. A pessimistic review forces one to consider “what if everything doesn’t go as planned?” scenarios, and at the same time forces one to evaluate one’s own exposure. Is your risk-reward in order? What will you do and how will you think if the results next week bring a SKYF (Saatanan Kiusallinen Yllätysfaktori - Damn Awkward Surprise Factor)? Neither the CEO, researchers, nor industry BP professionals can know the final results of clinical trials in advance. Therefore, it is also pointless to take statements, promises, or goals too seriously. Potential, however, can be invested in.
“Biotech makes losses.” That’s clear. The CEO’s role, in addition to conventional duties, is to secure funding. To ensure the best outcome, traditional Finnish modesty (the Jantelagen effect) - “don’t think you’re something, so you don’t seem arrogant” - is not enough. Actions and results do not always speak for themselves. In such cases, one should also be cautious about all timelines and hype, especially those that are not in one’s own hands. Key among these are, for example, clinical trial results, competitors’ clinical trial results, Phase 3 timeline, or partnering. Regarding sales, I think Faron’s own “Jeti Roosteti” has done an excellent job. Conservative sales work (obsequiousness) will not achieve Go-Above-and-Beyond goals. Still, I understand the things that are within the company’s control and the things that are not.
The goal was to partner in 2024. Goals are goals, and now the goal was not met. On the other hand, already in spring 2024, it was communicated that “everyone wants Phase 2 data, and that’s usually what you partner with in Pharma. That’s when you get the most significant deal, and that’s what we want too.” Goals are not promises, but they provide direction, motivate, and help make choices to reach the objective. The next goal is to get FDA feedback, study design, and a partner after P2 results, so that P3 starts first-patient-in Q1/26 (this wasn’t even a promise or necessarily even a goal, but a throwaway comment - once approval is obtained, it usually takes at least 6-8 months before the first patient is recruited). How many drugs has Juho Jalkanen commercialized before? I bet that the company itself is also learning a lot about timelines, pricing, the FDA, and BP bureaucracy, among other things.
One doesn’t need to do significant independent thinking or research to understand that forming a partnership agreement will take time. A realistic estimate is probably 3-12 months.
• 3-6 months: preliminary contract drafts - due diligence. All parties have a duty of care. This also protects owners.
• 6-12 months: final agreements, commercial terms, IP rights, financial responsibilities, joint development plan, etc.
It is realistic to expect a partner at the earliest by the end of the year. It is optimistic to think this will go faster. For example, SOM Biotech (SOM0226) and Corino Therapeutics: Approximately one year passed between the completion of Phase 2 and the licensing agreement, which is a typical time for partnering negotiations. There are faster examples, but in these cases, everything indicates that partnering and financing were well underway. Nothing in Faron’s case suggests this. In hot indications, negotiations can proceed faster. Slowing factors include the slowness of Big Pharma’s internal bureaucracy or a bidding war.
Speed is a positive thing for the stock value, but can at the same time be a negative factor for the deal value. The CEO’s job is to ensure the best possible agreement, even if it means flexibility on timeline targets. Everyone understands that even if an AA agreement and partnering are reached, the commissions from sales are years away. Any upfront and milestone payments possibly received from the agreement are budgeted directly for debts, next indications, research expansion, and securing operational activities - not for dividend payments. The good thing about this, of course, is that financial pressures are significantly reduced. As the story progresses, the stock value will hopefully rise. When is your exit?
In this company, there will always be the next milestone. It is unrealistic to assume that every single milestone will succeed according to targets (timeline and results). It is unlikely that even Faron’s own researchers know the final fate of the drug at this stage. If they did, they would certainly have already invested their own and their close circle’s assets in this.
However, I consider it a positive and significant factor that it is (at least originally) a family business, and almost all of them have a significant stake in the company. In my opinion, this communicates a strong belief in the company’s future, even if some of it has been received in the form of rewards and options. When insiders have their own funds at stake, they have a clear incentive to develop the company long-term and do their best for its success. Here, not only is their own ox in the ditch, but the entire close circle’s ox is in the ditch. In drug development companies, where the path to commercial success can be long and risky, such commitment provides additional confidence that everyone is strongly involved in advancing development programs and making value-based decisions even in difficult times.
Another significant factor I consider is the Scientific Advisory Board, which consists of internationally respected experts in immunology and oncology, as well as leaders in medical research and drug development. The advisory board members collectively have over a hundred years of experience in the biotechnology and pharmaceutical industries, particularly in the commercialization of research and development programs.For a drug development company like Faron, a strong and internationally respected MAB has significant strategic value. This value is not only scientific credibility and trust in the eyes of owners and regulators, but also profound expertise in various stages of drug development, not to mention networking opportunities, risk management, and appeal.
What probabilities of success do you give for your own successful exit?
Happy Easter!