7 Keys to Making Smart Deals in Today’s Pharma and Biotech Industries
February 04, 2019
Personal insights from pharma and biotech executives on unlocking value, protecting IP and growing business in a climate of M&As.
The year in M&A deals got off to a bang with the January 2 announcement by Bristol-Meyers Squibb of its intention to buy Celgene for US$74 billion. The merger, if approved, would make the combined company the fourth largest pharmaceutical firm in the United States. Following that announcement, Eli Lilly made a big splash on the first day of the JPMorgan Healthcare Conference, announcing its proposed acquisition of Loxo Oncology for approximately US$8 billion.
Whether these deals are a bellwether for a hot M&A market deep into 2019 remains to be seen. But it’s clear that an appetite for M&As between pharma and biotechs continues. To better understand that trend, FTI Consulting hosted a panel (see "Meet the Panel" below) of four executives from the two sectors to discuss current collaboration models from their unique vantage points. Here are select personal insights from the panel. (Read the full panel discussion.)
1. On Protecting Intellectual Property
How do you protect core intellectual property (IP) when forming a partnership?
Thomas Loeser, Origenis: “We have a particular focus on small molecule chemistry. So we start with filing patents for particular compounds against defined targets and indication areas. Once we create more data, we then can move on filing our particular selection patents, which then can be assigned to the partner and build up a strong and clean IP position for the partner.”
Joseph Zenkus, Pfizer: “We take our role in maintaining confidentially and working within a partnership seriously. It all begins with how agreements are drafted, but ultimately it ends with how operationally things are put into place. We put into place firewalls to make sure that the IP is protected and is not being exploited outside of the field.”
2. On Business Development
Is there a need for the business development function to evolve, and if so how?
Debanjan Ray, CytomX: “We’re developing a novel technology that allows us to focus the activity of antibodies. We used business development to advance the company, beef up the balance sheet and most importantly, get additional molecules into the clinic through the power of our partners. We’ve now shifted to doing more risk sharing, more profit-sharing collaborations where our partners trust us not only to do the research on their molecules, but take them into development, run initial CMC, manufacturing campaigns, and ultimately take these products into the clinic. It’s been a really important evolution for us because in that role, we control the timelines a lot better.”
Caroline Stark Beer, Alnylam: “I joined Alnylam in 2008, six years after the company was founded. Early on, deal making was critically important from a few different aspects. One was providing external validation — those one to two early deals in a company’s life cycle that send a signal to the broader biopharma community that this technology is real. And then of course, the other primary goal of raising capital with early deal making. As a platform company we are still thinking about partnerships that bring in expertise and allow us to do more than we’re otherwise able to do on our own. And then the next stage beyond that is, how we do we start accessing external assets and external technologies? We’re excited to see where this takes us.”
3. On Unlocking Value
Some deals are about transferring an asset; others are more collaborative. What is the key to unlocking value in either?
Debanjan Ray, CytomX: “For us, there’s a distinction between what’s the economic sharing of the profits and losses and milestones and royalties of a collaboration, and what is the operational sharing. It’s very important in the deal negotiation process to have honest conversations, both internally and with your external party, about the strengths of each company.”
Joseph Zenkus, Pfizer: “Being on the opposite side of the aisle, we have the luxury of doing transactions across the development and commercial spectrum. One thing that’s consistent as it relates to partnering is that we want to listen to our partners. If companies have aspirations to do big things, and you’re not listening as a big pharma partner, you’re doing your company a disservice.”
4. On Funding and Development Risk
How can funding and development risk be better balanced between companies and their investors?
Thomas Loeser, Origenis: “Before I joined the biotech industry, I was in investment banking. What we see right now is the third wave of an investment style that started with funding single assets through clinical development followed by asset-centric and build-to-buy approaches. We’re seeing today portfolio-type investing. It’s a new style of investing that follows the Markowitz portfolio theory and directs a lot of capital and a lot of nontraditional investors into the sector, because when you put together a bunch of low-correlation risk assets, you de-risk the entire portfolio.”
Debanjan Ray, CytomX: “I think about it from three parameters for [our company]. The first is capital requirements for a company. The second is how you get additional shots on goal for a broad platform like we have. The third is how you retain maximal value for the company itself and, therefore, for your equity investors. Parenting has a key role to play on each of those. We made a very conscious decision to hold onto our lead programs as long as possible. We made it very clear and explicit that we weren’t willing to partner our lead assets because we want to drive the pipelines of those programs. We wanted to communicate data as we felt appropriate, not how our partner felt appropriate. Most importantly, we felt like the way you build true value for financial investors is to advance wholly owned programs as far as possible.”
5. On Merging Different-Sized Companies
What are some critical elements to success when striking a deal with different-sized companies?
Caroline Stark Beer, Alnylam: “The cultural aspect that you started with is what we view as fairly critical. You can tell pretty early on in scientific discussions even before negotiating a deal . . . by the like-mindedness between the teams. Even research collaborations — that’s given the companies an opportunity to test the water at some level to see what kind of dynamic we have. I also think deal structure and setting each other up to play to your strengths, to divide roles and responsibilities in ways that are crisp, is essential.”
6. On the Importance of a Steering Committee
How important are steering committees to ensuring a partnership moves along according to schedule and achieves its goal?
Joseph Zenkus, Pfizer: “Making sure there's a sponsor for the program internally at both companies that see eye to eye and talking on a regular basis [is important]. No matter what governance you have in place, if you don't have the right people on the governance team ensuring that they're doing the right things on a day-to-day basis, it doesn't matter. It's all about both parties wanting to progress the asset. And then, it must be written into the contract . . . in case things fall apart.”
Debanjan Ray, CytomX: “For us, there’s a distinction between what’s the economic sharing of the profits and losses and milestones and royalties of a collaboration, and what is the operational sharing. It’s very important in the deal negotiation process to have honest conversations, both internally and with your external party about the strengths of each company.”
7. On Product Reimbursement
How do you determine which company in a partnership is going to take the lead in product reimbursement when forming a partnership?
Joseph Zenkus, Pfizer: “The commercial partner is going to be responsible for that. It’s something that can’t be shared. You solve that in the contract — the other party can have a say and we’ll listen. But you invest with a company like Pfizer because of our commercial capabilities.”
Quotes have been edited and condensed for clarity.
© Copyright 2019. The views expressed herein are those of the authors and do not necessarily represent the views of FTI Consulting, Inc. or its other professionals.
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