AND CLEAR GOALS KEY TO
Relationships, Planning, and Clear Goals Key to Biotech Deals
Honesty is the best policy in biotech dealmaking say experts from Merck KGaA, Forbion and MorphoSys, who stress that clear goals are vital when seeking investment or development partners.
Collaboration is the lifeblood of drug development. Whether you are bringing together scientists to turn a promising candidate into a product or trying to attract financial backers who are expert at commercializing products, partnership is critical.
And all parties in a partnership should be open and transparent according to Lori Badura, VP, Head of BD Neurology and Immunology at Merck KGaA, who opened the “Seal the deal” panel discussion at BIO-Europe Spring®.
“What I like are partners who are transparent and candid about their objectives, their goals, what they want to be able to achieve from the deal and also, importantly, what their limitations are. It saves a lot of time, if both parties can engage and find common ground to build from, and actually set up a relationship that is more win-win.”
Juliette Audet from Forbion agreed, explaining honesty is a must for biotechnology firms seeking venture capital backing to turn ideas into medicines.
“We look at relatively early stage companies. It’s quite important that they tell us immediately if there’s some weird licensing that they have, or some weird set up, or a cap table that is a little bit, I would say, non-conventional. It’s easier if they tell us from the beginning on.
“If we discovered them later down the line, it feels like it has been hidden proactively from us. That does affect the trust, so I would say this is one of the really important things.”
For Samuel White, business development director at Morphosys, transparency and consistency are important as drug development deals progress.
“I think it’s really important early on to reach a mutual understanding as to what both parties want to get out of this dealmaking endeavor. One of the challenges is if you see a lot of changeover in the counterpart you’re dealing with. So it is nice if you can have a consistent interface on the other side.
“Of course, as you move towards the finish line, the team may grow. You may be bringing in additional sales lawyers, external advisors, consultants and the like. But if you can maintain a consistent point of contact and not have too many changes that’s only a good thing.”
Understanding cultural differences is also critical in any deal, particularly given the global nature of the biopharmaceutical industry. Lori Badura from Merck cited preparation as key to this process, in terms of maintaining both clarity and efficiency.
“There are two reasons for doing that. One, you don’t want to inadvertently do something that is potentially offensive to somebody from another culture just out of ignorance, particularly when you are in their culture when you are going to visit them.
“And secondly, I find that when you take the time to do that research and really understand who’s on the other side of the table, it helps to show them that you actually are serious about it, that you will go the extra mile.”
This view was echoed by Morphosys’ Samuel White. He said “I think it is important where possible to try to reciprocate the preferred forms of communication so call me old fashioned here, but I would prefer as early as possible to move, if face to face is not possible, to get on the phone with counterparts as early in the interaction as possible.”
He added, “If we think about interactions that I’ve had, over the years with, particularly Japanese companies, I’ve found that there’s been a strong preference to engage in a written back and forth, and then have certain structured meetings where they would ensure the right people are on that call.”
Forbion’s Juliette Audet is of a similar opinion. She said, “The most effective way of crossing the cultural barrier is to do your preparation, and then show that you’re willing to go the extra mile to understand the other person’s culture and preferences for communication.”
Another vital part of any deal is that the parties involved have an effective internal structure that will support the project, rather than simply looking like they do to attract a potential partner.
Merck KGaA’s Lori Badura said, “One of the things I found very frustrating is, if you make a misstep then you’re not perfectly aligned with internal strategy, or you haven't formed the right people at the right time and got your internal people geared up. There are two things that happen.
"One, you start to get some organizational confusion and things [end up] not moving forward properly internally. But you don’t project a very organized view to the partner either. So to the partner, anything you’re doing internally to manage your crew shouldn’t be invisible.”
She added, “You should be coming to the table ready, but we often have too much focus on the externally looking view and not, okay, we’ve run this through all the things within the company we need to for the stage and we have gotten the green light to go forward. If you don’t have that green light, don’t do it yet, because all that’s going to happen is you’re going to frustrate your partner, you’re going to look like you have a chaotic organization.”
"What I like are partners who are transparent and candid about their objectives, their goals, what they want to be able to achieve from the deal and also, importantly, what their limitations are. It saves a lot of time, if both parties can engage and find common ground to build from."
Lori Badura, VP, Head of BD Neurology and Immunology at Merck KGaA
For Morphosys’ Samuel White, a proper legal team is key.
“Making sure that the internal teams are in a position to be able to support the BD team on the licensing side of things. At Morphosis we’re in a nice position where we have a great, great team of in-house legal counsel. But we also work routinely with externals as well. And so the core negotiation team for us is essentially a group of folks from BD, internal legal, external legal, and then one or two leads from IP.”
This approach is also used by Lori Badura, who said, “Our core deal team is business development, with legal IP to some degree controlling. And then we also include our external innovation group. They’re the folks who are running the diligence process.”
For smaller firms that lack internal legal clout the use of external lawyers is an option, but there are positives and negatives to the approach, said Juliette Audet from Forbion.
“If you have two lawyers talking to each other, and both of them are external parties to either the VC or the biotech, sometimes it over complicates, and the essence of the deal gets lost a little bit. It’s usually easier to just pick up the phone and say, ‘Hey, what is happening in this thing that both our lawyers are discussing at the moment?’
Ultimately any licensing deal or investment agreement is about money. Setting the financial terms of any agreement—a term sheet—is core according to Lori Badura, who stresses the importance of an effective business development team.
“I prefer to drive the initial negotiations for term sheet—the high-level financial terms—by pretty much keeping it within BD, and then going to legal or IP as needed.
“Once we have the term sheet agreed and we move into formal contracting, that’s when pretty much legal and IP are there at the table—more for those final negotiations, because you’re getting into the more in-depth discussion about particular points.”
Samuel White shared a similar perspective, adding, “Understanding the financial position in a deal structure is important. And then what are the key non-financial deal terms and if you can use a term sheet to align on those, that’s what you’re looking to achieve with a term sheet.”
From a venture capital perspective, deal term sheets are often simpler, according to Juliette Audet from Forbion.
“When we do a finance thing, most of the time the company already exists, so there’s not a lot of room for negotiation.
“So the term sheet is, I would say, probably more straightforward. We price the shares, and then say how much we want to take of the round, which is honestly the core of the term sheet. There’s going to be some liquidation preference, there’s going to be some governance, so who sits on the board, and how many times the board should meet. That’s pretty much it.”