Ten stages to a successful pharma partnership
Jean?Louis Roux Dit Buisson
Foro Ventures
With the current and anticipated losses of patent protection and the lack of productivity of early stages pipelines, it is high time once more for licensing and acquisitions in the pharma industry. In this article, Jean-Louis Roux Dit Buisson takes us through the ten steps to a successful partnership.
1. Hire professionals
If you come from a start-up or small biotech, there are chances that negotiating a license, an acquisition, or a fund raising contract is your first major opportunity, and often the last, to deal with big money big issues. In most cases, you will face individuals and / or teams which have done a few transactions prior to dealing with you.
If you don’t have a shrewed negotiator in your management team and even though the daily fees might seem astronomical, I recommend that you get professional assistance. Choose them carefully and listen to their recommendations.
2. Plan
At the time a deal is about to be signed, the sky is blue and the sea is calm. Big money is on the table and no one wants to rock the boat. However, this is the time when exit clauses and conditions have to be negotiated. If push comes to shove, in the middle of difficulties, everybody will try to pull the cover to themselves and there will be no cold headed deal in the heat of the discussions.
You also need to plan for different scenarios. Especially if you are the little guy in the discussion and if revenues from the market will come in a number of years, you need to have a few scenarios to work with. It is obvious that a set of scenario would take the potential product profile as a basis for modeling, but also don’t hesitate to ask for the hypothesis sustaining the development of sales. You want that your partner makes the highest possible mileage with your innovation, and you need to have a way to verify that he / she will endeavor to maximize the revenue of your product.
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"If you are on the acquisition side, you want to convey to the development team the notions of time to market...."
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If you are on the acquisition side, you want to convey to the development team the notions of time to market and competitive product profile at time of launch. Using scenario planning is a didactorial process to introduce revisitation mechanisms and to share value creation processes.
3. Agree on revisitation mechanisms
In the course of a development project, options, if any have been defined, might be confirmed or infirmed. We have seen in previous articles how this impacts the value of the deal. If no revisitation mechanism has been agreed, it can prove difficult to bring the party with the least interest to it to revise the terms of the deal in order to take the new information into account.
4. Laziness never pays
Your assets have value and in the bio-pharma industries they are most likely to be considered as unique by you and to some extent by the other party.
Now why rely on “comparables” to assess a value for them? Or P/E ratios? Use these metrics to check to which extent the value that is derived from proper and detailed financial modeling is deviating from a “norm”, and if it does, try to understand which hypothesis is causing the deviation, and double check it. Being wrong on this hypothesis might be the kiss of death, having the proper argumentation to defend it might mean access to the gold pot.
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"...I do recommend working out your models: it’s the only way to know and defend your key hypothesis."
In any case, I do recommend working out your models: it’s the only way to know and defend your key hypothesis. And in doing so, compute the value that you estimate the other party will derive from acquiring or selling the asset.
5. Get appropriate distance from numbers
The values that are computed are estimates and depending on how you define your set of hypothesis you end up with a number of possible outcomes.
That’s your multi-dimensional space for negotiations. Use it as such.
I remember a lady presenting the results of her NPV analysis to the board on a slide with a single number: 13’645’827, 90. When one of the directors asked what was her degree of confidence in the second cypher after the comma she broke out in panic.
6. Use separate teams to negotiate and to operate
Numbers and results are here to guide you in the discussions. Of course each dollar matters. So negotiations might hit the heated zone.
However, what matters is that you do repeat business with people with whom you like to interact with. And going through the day to day deliverables requires day to day interactions.
It might be a wise thing to separate the teams that are negotiating from those which are going to deliver.
7. It’s not the value it’s the price
Though they usually come at the end of the process, discussions on financial terms are deal killers.
It might be a good idea to address the issue already at the beginning of the process, in general terms covering the two most important aspects of the deal in terms of effective payments:
• How are we going to share the value?
• How are we going to share the risks?
Most innovators do not realize that in early stage developments they could claim a limited share of the total value, for a single product. Various contributions in congresses have mentioned that a 30 / 70 share of the deal value between the innovator and the other parties would be fair.
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"Most innovators do not realize that in early stage developments they could claim a limited share of the total value, for a single product."
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In late stage deals, when the development risk is less and when the time to money is closer e.g. the acquiring party has an urgent need to solve, then the spread can be skewed in favor of the inventor.
If the inventor has doubts about the fairness of the value sharing proposal, an idea is to walk him / her through a P&,L statement and highlight the portion of sales that is dedicated to R&,D, and if a spread is available between the R part and the D part, it’s even better.
8. Sharing risks
Sharing the risks means agreeing on a schedule of payments reflecting the added value at each stage of development, in case of a licensing deal. The more you are willing to share risks, the more value you should obtain. This is usually reflected by higher than usual licensing and / or royalty rates.
9. Portfolio management
With the influence of funds and the pressure on share price, the availability of sophisticated software and methodologies, plus a myriad of graduates in finance each year, it is likely that an investment be also, if not exclusively, considered as a portfolio maximization object impacting the overall risk and revenue profiles of the acquirer. If you spot that you are in this type of frame and if you are not used to financial management, call for expert advice in presenting your benefits in the negotiations.
10. It’s a small world
And reputations are at stake with every negotiation. Talleyrand, a shrewed negotiator, used to say that his best asset in negotiations was his cook. This reflects one aspect of getting to an agreement. You might also be confronted with the hasted short dead-lined type who is going to walk all over you.
Be prepared. Ask previous negotiators who have been confronted with the party you are going to meet how they lived the whole process, before and after the agreement.
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About the author:
Jean-Louis Roux Dit Buisson is a Professor of Entrepreneurship at the Grenoble Management School in France. He is founder of Foro Ventures, a company dedicated to provide assistance and interim management for top-line growth projects and turn-arounds.
Jean-Louis is specialized in high technology sectors (such as Bio Pharma, Medtech). He has an MSc from MIT and an MBA from INSEAD and can be reached at jl@forotech.ch.
How can pharma manage the partnerships and licensing processes effectively?
