How to get the biopharma deal you want

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Dr Neela Patel, Chief Business Officer at Bonum Therapeutics, offers advice on how to negotiate a winning deal in biopharma that meets investors’, buyers’ and sellers’ goals. 

Business development (BD) is an essential ingredient to the success of early-stage companies, whether they plan to exit through M&A, IPO, or have other mechanisms to return money to investors. The most effective corporate strategies, while typically and necessarily focused on scientific goals, also closely integrate well-designed BD objectives and scenarios. When the science lines up, execution of BD goals can enable time-appropriate returns to investors, lengthen the runway (time to cash out), and expand the reach of core technologies beyond programs that can be carried out internally. 

Deal-making has played a major role in the transformation of the biotech industry from a niche sector of the economy into a steady source of innovation for new medicines. Every company is resource-constrained in terms of the number of programs that it can explore. For pharmas, new programs and portfolios from biotech companies offer a way to augment internal research. For biotechs, partnerships with pharmas provide a source of income, useful technical knowledge, and a path to progress programs into the later stages of clinical development and commercialisation, the latter of which the biotech is unlikely to be able to do on its own. While the types of deals sought can range from a limited technical collaboration or technology access deal all the way to an acquisition of an internal portfolio program or the whole company, many factors leading to success are the same.

Although BD is often perceived to be purely a transactional or financial activity, scientific acumen, judgment, and soft skills are also important to moving forward with the right deals. Doors at pharma can open either with BD-to-BD outreach or scientist-scientist interactions at conferences and networking events. Your internal scientists and those of the buyer’s play key roles as well. And all deals require a team of attorneys who understand the goals of both the business executives and scientists. It is an important part of the BD role to bring all these disparate stakeholders together and help them to communicate effectively.

As a scientist and business executive with decades of experience, I have represented both sides of the table, including large buyers and small sellers. Every deal that closes has twists and turns that are only known to the buyer and seller; both hazards and opportunities await those at the start of a journey to a deal. Long-term planning, patience, and flexibility are essential to finding the best possible partners who understand the value of a program, and to reaching agreement on deal structures that are fair and appropriate, and that set the stage for future success.

Deal makers should first focus on parties that are most likely to help them achieve their goals. Sellers should take the time to identify potential partners who have the expertise to understand and appreciate the program, evaluate if they demonstrate a long-term commitment to the therapy area, get a sense of whether both sides’ timing to license or purchase the asset align and if the buyer has the financial and technical resources to meet your goals and advance the program post-acquisition. The pharma counterparts in search and evaluation (S&E) are doing the same, as they want to spend their time wisely. Sellers should, too! 

By following the science and associating the deal with the key de-risking points for the program, companies should be able to move forward with optimal speed and mutual satisfaction (with the caveat that a good deal is one in which both sides are a little dissatisfied after signing given the compromises that were necessary to get it done). Timing is critical, but regardless of the market cycle, big pharma and biotechs are inherently co-dependent, a dynamic that is central to the health of the drug industry. While pharma usually has more power at the negotiating table, it still requires access to novel technologies and scientific creativity that are core to early-stage companies. The recent sluggish deal market may have obscured this dynamic, but the M&A deals announced at JP Morgan this year indicate the tide may be turning back to a more balanced dynamic. 

The key to internal alignment is sustained communication

Regardless of which side of the table one sits on, internal alignment among stakeholders before entering negotiations is key to avoiding issues down the road. Challenges inside big organisations stem from size and the associated complexities of decision-making. Frequently, multiple committees sign off prior to a non-binding term-sheet proposal. Deals can take months or years to get to the negotiations stage, so be prepared to sustain conversations over the long term. On the buy side, this means socialising the deal at the right time with the right stakeholders, i.e., having informal conversations ahead of meetings with decision-makers to address concerns and sell the idea internally. 

An understanding of the key players on the other side of the table will help you maintain good communications throughout the process and to overcome the hurdles that invariably arise. On the sell side, early identification of the buyer’s deal champion, as well as of key decision makers (if possible) is critical. Without an obvious technical champion, who is usually a senior level scientist, the probability of closing the deal greatly decreases. Interactions should be maintained across the disciplines, ie., BD-to-BD and scientist-to-scientist, to be sure that the champion sees new data when appropriate and stays engaged. Once in negotiations, the pacing can also be variable; keep in mind that the BD executive’s priorities are not always top of mind for the organisation’s leaders. 

In situations in which the deal will require board approval, establishing clear, ongoing information and sharing this with the board of directors is extremely important to eliminate downstream surprises. This is easier to do if the BD strategy is integrated into the general corporate goals and therefore part of regular board discussions. Provide the board with a specific proposal or term sheet(s). Offering hypotheticals is rarely productive because they provide insufficient information for understanding the value proposition or decision making. Also recognise that individual board members have fiduciary responsibilities to their own limited partners, which colour their perspectives on deal terms and timing with respect to the life of the specific fund that made the investment. Know your board and make sure you meet their needs along the way.

Importantly, sellers should have parallel, ongoing conversations with multiple parties and several financing options when going into a transaction. In the early phase of the process, interactions with multiple parties can lead to a better understanding of the value proposition, potential deal structures, and the buyers’ perspectives on a potential deal in the context of the overall marketplace. Lining up acceptable alternatives to a deal, including another bidder, or financing to advance the programme internally for higher returns in the future, leads to a stronger position at the negotiating table. Of course, not every biotech has the necessary long-term financial cushion to be flexible, but discussions with a board can sometimes result in a commitment to additional funding, at a minimum to bridge if a deal looks likely.

On the sell side, if the buy side counterpart is relatively junior, the seller can increase the odds of securing a transaction by providing that person with information he or she should be sharing internally, such as deal comps and competitive landscape data. Sellers could also offer to prepare slides for the other team to present and make sure that the seller’s tech team and the internal champion on the buy side directly work together.

Finally, building long-term, trusting relationships between both parties is important. Early conversations allow biotechs to get valuable feedback from potential partners, and pharma scientists and executives to get to know the biotech team, even if a deal is not on the immediate horizon. Biotechs are well-served by being transparent about data; pharma does not expect early-stage companies to have every answer, but rather to be honest and straightforward. Pharmas that are clear about their strategic interests and engaged at the scientific level with biotechs are more likely to be preferred partners of biotechs. 

Get beyond the numbers 

Negotiators need to understand each other’s dynamics, particularly the levels of authority represented at the table and their commitment to the transaction. The opposing team should be asked upfront to explain its deal approval process and, at a minimum, to provide informal guidance on the terms it is seeking.

At the outset, all negotiators need to understand whether the asset, programe, or platform in play is potentially transformative for the buyer and, similarly, for the seller. Importantly, identify the other team’s champion and determine whether that person is involved in the actual negotiations or is bringing in the right people to complete the transaction. Clarify whether mid-level scientists who are eager to license or acquire the assets and leading the discussions still need to clear the case with a senior executive who may not be that interested in it. What processes will negotiators have to follow to send a non-binding term sheet, and later, to be able to get the deal signed?  

As soon as strong interest is indicated, both parties are well-served to discuss the scope and structure of the potential deal. Does one side strongly desire an asset purchase or acquisition, while the other side prefers a co-development or co-commercialisation transaction?  Make an early determination as to whether the parties are in the ballpark for financials or residing in different universes and unlikely to reach agreement. As the seller, be careful about proposing numbers without a term sheet because the buyer will not offer more than what the seller initially asks for; refer to comps to avoid having to cite a specific number. 

Structure the deal to meet both parties’ needs, rather than to fit into a pre-determined cookie-cutter framework. Various kinds of hybrid deals combining upfront payments, milestones or earn-outs are increasingly common and can be used effectively to meet both parties’ demands while limiting their risks. The sale or license of a program by a biotech enables that asset to move ahead with an experienced development and commercial team, beyond what a small company could do on its own and provides innovators with non-dilutive capital. Innovators can then focus on what they do best and create new assets.  Collaborations can be a good way for pharma to access a platform and can extend the reach of a biotech’s programs, beyond what the latter could accomplish itself, as well as bringing technical expertise to the biotech.  

However, co-development terms can create challenges. Although these are a standard tool in the BD executive’s armamentarium, they are difficult to execute in practice and, with exceptions, run the danger of slowing down progress, since development plans, data and progress often need to be reviewed and negotiated by both parties. The best co-development deals have input from alliance management on the specifics in the agreement – the more clearly each party’s responsibilities are delineated and separated from the other’s, the better. 

Even in the best of circumstances, negotiations are rarely straightforward. Power imbalances are inevitable between large, deep-pocketed buyers and smaller sellers, but biotechs that have clearly defined priorities are generally better equipped to carve out positions of strength under pressure. Internally confirming a few non-negotiable priorities, while tough to do, is important, particularly in lengthy, complex discussions. Disciplined negotiators make a practice of deciphering what they want to fight for realistically and what to let go. They have firm walkaway targets, so that they do not waste time working on transactions that will never materialise.

And while both parties may agree on the key terms in a contract, until a draft is available, neither side knows what the other side will inadvertently throw in. There are always curveballs. For these reasons, good lawyers are crucial, so allocate a generous legal budget. In the deal that I co-led at Bonum’s predecessor company, Good Therapeutics, we did not use bankers, but we purposefully budgeted for and hired experienced attorneys to help with the contract. These professionals fought on our behalf and also found creative solutions to fixing roadblocks. Contracts translate the non-binding term sheet into a full agreement and define non-financial terms such as intellectual property, warrants and represents, and non-compete arrangements. They can also establish the framework for joint committees for research, development, IP or commercialisation.  

Success is a bigger pie for both sides

The factors above all played a role in the deal which led to Bonum’s launch in November 2022. Our company has a platform for developing context-dependent, targeted therapies based on allosteric regulation, an extremely challenging area of science. 

Bonum is a successor to Good Therapeutics, which was sold to Roche in September 2022 for $250 million, plus significant milestones—one of the largest M&A transactions in 2022 for a pre-clinical stage program. I was chief business development officer at Good at the time, and along with Good’s CEO and founder John Mulligan, I led negotiations for the sale. 

The transaction was unusual and carefully crafted: the Good sale included the IP for its PD-1-regulated IL-2 program, and a license to Good’s platform technology for that program, but Roche did not acquire the platform itself or other programs in Good’s pipeline. Those assets were retained by Bonum through a carefully crafted spinout structure, allowing the company to continue to exploit the platform, while Roche pursues unencumbered development of Good’s PD-1-regulated IL-2 program in an area where it has deep expertise. Roche was not burdened by unwanted infrastructure, reporting obligations, or other complications that could become distractions to their emerging program in a more traditional licensing structure.

Following the transaction, Bonum hit the ground running with the technology, infrastructure, and ongoing programs intact. The entire team from Good moved to Bonum. All the investors in Good benefited from significant returns and all of them, plus one new investor, participated in Bonum’s $93 million Series A. 

Regardless of which side you represent, the principles are the same in a negotiation. The goal is to determine the key needs of both parties, and the best way to meet those needs, if possible, as soon as possible. Finding creative solutions that make the pie bigger for both sides, so that everyone obtains what they want is one of the challenges and rewards of my job.

DDW Volume 25 – Issue 2, Spring 2024

Biography:

Neela PatelDr Neela Patel, PhD, Chief Business Officer at Bonum Therapeutics, is a business development executive with 25 years of leadership in drug discovery & development, project & portfolio management, and pipeline development through external innovation. Previously, she was Chief Business Development Officer at Good Therapeutics, where she co-led the Roche transaction and spinout of Bonum.

 

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