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As Executive Director of BioFinance Canada, I invite you to review the formal proceedings of BioFinance 2007. This year’s meeting attracted over 700 delegates and 30 sponsoring organizations, including a broad group of publicly traded firms, private companies, and service providers in the biopharmaceutical industry. It is with great pleasure that I present to you these highlights of the inaugural panel session entitled, “Breakfast with Dealmakers: Partnering with Pharma and Biotech”. I would like to thank Nora Cutcliffe, PhD, BioPharma Consultant, for her expertise in preparing this plenary session summary on behalf of BioFinance.
Michael Stinson, Executive Director, BioFinance Canada Master of Ceremony: Michael Stinson, Executive Director – BioFinance Canada
Moderator: Mark Lievonen, President – Sanofi Pasteur Limited
Panelists:
Jim Mitchell, VP Pharmaceutical Development – Hospira Inc.
William Hilson, Director Finance – EMD Serono Canada Inc.
Christopher Gallen, President – Neuromed Inc.
Paul Resnick, Senior Director, Strategic Alliances – Pfizer Inc.
Eileen McMahon, Partner – Torys LLP
Plenary Session Title: Breakfast with Dealmakers: Partnering with Pharma and Biotech
Date: BioFinance 2007, Wednesday, April 25th, 8:00 - 9:00 am
Michael Stinson welcomed the conference delegates, and formally opened the BioFinance 2007 meeting by introducing Mark Lievonen as the inaugural breakfast session moderator.
Mr. Lievonen: I would like to extend a warm welcome to our panelists who represent a diverse group of Canadian biopharmaceutical companies. Recently, we have observed significant recent growth in the biotech sector, as well as in the service sectors surrounding the biopharma industry. For this plenary session, the intended format will include brief company introductions, followed by a panel discussion encompassing the topics of laying the groundwork in seeking partnership opportunities, entering negotiations, and driving the deal to conclusion. My goal this morning is to lead a lively Q & A session to engage both our panelists and the audience.
Mr. Lievonen: By way of introduction, I would like to hear your views – from your current corporate perspective – on what pharma companies look for, in terms of seeking partnership opportunities with biotechnology firms.
Mr. Hilson: I will begin by referring back to 2006 – I’d like to underscore innovation as a key example of what pharma companies are seeking. Larger pharma companies aim to acquire technologies they don’t have in house, including products in immunology, as well as anti-infective and anti-cancer agents. We’re seeing partnership and alliance deals to permit access into growth areas, including targeted therapies and niche markets. In addition, pharma companies are increasingly eager to tap into the technical know-how offered by smaller biotech firms.
Dr. Resnick: I have a similar view, in that pharma companies can learn from innovation occurring outside their own walls. Pharma companies have huge budgets, but they must look externally for new ideas. At Pfizer, we’re actively involved in 10 different research areas; we look for partners to collaborate and fill in specific gaps.
Dr. Gallen: I can offer a different perspective. At Neuromed, we’re developing central nervous system (CNS) drugs, and last year we entered into a partnership with Merck involving drug candidates to block N-type calcium channels as a mechanism to alleviate pain. We’ve got great products that we believe in, and we think they will work in the real world. Now if you look at the key teams responsible for evaluating products on the due diligence side, I see two classes of individuals. There are those on the affirmative side, who will become very involved with the discussion, and will tend to drive the deal forward. But you’ve also got those who will block the deal, and in my experience, they are more likely to be on the technical side, including pharmacology, toxicology and product formulation. They may believe that in-licensing of a given product will make them look bad, particularly if the product has weak pharmacology data or toxicology problems. So I would advise that you do solid work before you get to the due diligence stage – do not attempt to move forward with shoddy data or to “put lipstick on the pig”! You need to demonstrate that you’ve got a “doable drug”. You don’t want to be in a situation in which your data package is not adequate for the price you’re asking. Again, my advice would be to aim for first rate data; particularly since your data will be hitting exactly the person who has the responsibility to throw out second rate work!
Dr. Mitchell: To address what biotech can bring to pharma, I believe that biotech companies can bring novel technological improvements and great enthusiasm. However, a healthy dose of reality is also required. For example, the biotech firm may be a one-product company, and management also needs to be realistic regarding the efforts required to move forward from the current stage to commercialization as the end game.
Mr. Lievonen: Smaller biotech companies generally believe they have more assets or data than they actually do; this does make it difficult.
Dr. Gallen: There is a saying that goes, “You should love your ideas, but you should never marry them!".
Ms. McMahon: I’d like to ask a question to Chris. If we say that the data package needs to be first rate, then how do we deal with appropriate allocation of funds, i.e. how should the company prioritize? And how/when does the biotech company know the package is adequate to satisfy the potential pharma partner?
Dr. Gallen: I believe the focus has to be on getting the deal done. A bullet-proof preclinical package is better than a Phase I data set with holes. We need to consider the perspective and thinking of the other side of the table. Generally the ratio of spending follows the pattern of 1:3:10 for preclinical: early stage clinical: late stage clinical & commercialization. However, the industry has seen many products fail at the clinical trial stage. Also keep in mind that if a pharma company reviews 150 deals, somewhere in the range of 100 will be thrown out as bad ideas, and of the remaining 50, perhaps about 20 will make it to the due diligence stage.
Mr. Lievonen: Now let’s move on to consider how the company should present itself, especially with regard to intellectual property (IP).
Ms. McMahon: To follow on from Chris’ comments, I certainly believe that biotech companies have to put their best foot forward at every stage. The first step is typically to provide a non-confidential package, which gives enough information to see if the pharma company is intrigued. Once a confidentiality agreement is signed, the second step is to provide detailed information that makes each team member’s job easy. For example, you should provide regulatory, toxicology, and patent reports, each with an executive summary. You should also state where the blockages are, and provide an overview of the strategies you propose to manage these issues. This will distinguish you from the other 150 companies being considered.
Dr. Resnick: I agree that the non-confidential package will be the trigger to get your foot in the door; it should be a 1-2 page summary. Your initial contacts will then talk to other colleagues within the pharma company. Of course, you will also have the larger version. One specific note regarding patents – this section may take the longest to achieve consensus and collaboration, so I would suggest you aim to have this section ready to go, i.e. to begin that process.
Mr. Hilson: To add a few more points, one of the key criteria from the pharma perspective is to see consistency with the business model. The partnership could be an R&D agreement, or a co-promotion of a specific product, but the pharma company should ask itself if the nature of the partnership is outside the business model of the biotech firm. Does the biotech company understand its direction and course of action; does the senior management team have its heads around pursuing this type of relationship? So I want to emphasize that you should strive for fit in terms of the business model(s), not just appropriate fit on the technical side. Also, business development folks will have a keen eye for identifying strengths that will bear fruit, as well as hurdles that may surface during future discussions with VC investors.
Dr. Gallen: Along the same lines, let’s assume that by now your company is organized and objective, as potential partners make an assessment of your technology. At Neuromed, when we did the Merck deal, we also conducted our own due diligence on ourselves. We came in as the users, and we asked: Which questions will be raised? Where are the files? We re-organized our materials into packages to address specific questions, so it would be easy for the pharma company to get their work done. This sped up the process significantly, and we got positive feedback for taking that initiative. Overall, you need to be aware that for pharma evaluation teams, the due diligence process is an add-on to their demanding day jobs.
Ms. McMahon: If you do have gaps in your data package, it will help your credibility to disclose them. You may think it’s wiser to let the pharma team discover these gaps for themselves, but it is much better to be up front regarding your weaknesses. If you state how you will deal with specific challenges, this will demonstrate both credibility and integrity.
Dr. Gallen: The worst thing is to hide weaknesses or flaws. Who wants to deal with some one you can’t trust?
Mr. Lievonen: OK, let’s assume that the biotech firm has good data, and is ready to move to the next stage. How should the company make the necessary contacts in approaching the pharma side? How can you ensure the right people will see the business plan, and how do you make your way through big pharma organizations?
Dr. Mitchell: Big pharma companies have offices for technology assessment, but you can also enter directly via the business development team. At Hospira, we like to see companies coming in via the technology assessment side. It’s like dating; it’s all about making it to the second date. Persistence will help you to be successful. Many things go on in parallel, and you must keep the attention on your product or technology with many follow ups.
Mr. Hilson: There are several groups within the global organization that screen proposals, including corporate development, business development, and the various therapeutic areas. One avenue is to look within your own organization or industry, and ask who has come from that particular pharma company. These individuals can help clear the pathway or direct you to the right person. Many biotech folks have come from pharma, so it can help to tap into this knowledge base.
Dr. Gallen: We tended to have interactions with discovery groups when we were seeking partnerships. Four groups were already engaged in serious due diligence discussions, and three of them knew our discovery group to be credible from scientific meetings. Industry meetings are an excellent way to assess human interaction. Although we dealt primarily with discovery groups, clinical teams can also be involved. Like the thousands of gossamer threads that were used to bind Gulliver, it’s important to bring together different groups in building corporate relationships.
Dr. Resnick: I agree there are many opportunities for collaboration that may lead to no deal – this is still important in building relationships. Big pharma actually monitors this, and positive impressions can lead to future developments.
Mr. Lievonen: I’d like to comment that persistence is a core competency in many ways. Often, it takes a great deal of effort to move from 95% to 100%, in terms of pushing the deal to completion. Multi-relationship support is required for adequate “ground swell”, so this can really help. Also, don’t assume that if you know so and so, you’ll achieve a certain outcome. You need to explore and understand multiple avenues.
Mr. Lievonen: Smaller biotech companies generally have less structure, but I’d like to ask the panelists for comments regarding the structures that should be in place on the biotech side when entering or negotiating partnerships.
Dr. Gallen: In our case, we had two main contacts – Sean Cunliffe, our Chief Commercialization Officer (CCO), and Terrance Snutch, our Chief Scientific Officer (CSO). This is really a people business, and whoever knew the appropriate people tended to get involved.
Mr. Hilson: It depends on where the biotech company is in its life cycle, as there can be many avenues. Many times you’ll see key contacts on the scientific side, but there can be other past histories, so you should look through your organization for these.
Ms. McMahon: I’ll give you an example of a senior management team that believed its biotech product was excellent, but didn’t have any contacts on the relevant pharma side. In this case, the company went into the SEC database, and also did Google searches to identify appropriate individuals. Next, they tried to determine which business events those folks would attend over the coming 1-2 month period, and they attended those events themselves. They hunted down their target people, and they essentially said, “You have to talk to us.” And sure enough, a deal was done. The pharma team was impressed by the pro-active approach and the persistence they demonstrated.
Mr. Lievonen: That’s a great point! Now let’s move on to discuss the point at which a company is ready to enter into a deal. Would it be Phase I or II? What are the milestones required to initiate partnering discussions?
Mr. Hilson: An organization needs to look at its key objectives for entering a deal. Senior management should aim for the highest point on the value curve, or in other words, the point after which the cost of going forward will diminish the deal value. To look at Chris’ Neuromed example, the goal was to partner after reaching Phase II. They knew exactly where the product stood, with specific milestones in place for product selection, as well as timelines for approval. This detailed understanding helps to determine when to enter negotiations.
Dr. Gallen: I would advise not to get hung up on preclinical versus Phase I or II, or the size of the deal. It is more important to know when the deal is credible. So my view is that the mistake is not with regard to the phase of development, but it more directly pertains to the credibility of the technology and story. In a rising culture of expected net present value (ENPV) utilization, biotech firms might anticipate the following shares of ENPV: 10% (Phase I); 25% (Phase II); 40-45% (Phase III); and 50% (product registration). However, matched with the ENPV curve is the steeply rising (logarithmic) expenditure curve. The key issue is to define your core competencies – for example, you may be good at developing new molecules, but not so good at conducting large clinical trials and driving commercialization. Alternatively, if you have an excellent mechanism or model for proof of concept, you may have a different course. The real key is to offer quality in your chosen area of expertise.
Dr. Mitchell: Pfizer will look at early stage companies, whereas Hospira tends to consider companies in Phase II or beyond. In general, biotech firms should do their own homework to determine if the target pharma company has a preference based on clinical stage, or some other strategic perspective.
Dr. Resnick: Yes, biotech companies should do their own homework, and they should also ask potential pharma partners what they want, in order to obtain optimal value.
Mr. Lievonen: So now we’ve had that first meeting. How does the biotech company ensure it gets the next date, and move forward from there?
Mr. Hilson: I agree that persistence is a core competency; this is the key driver. The question is, how to do this without offending the other partner? They have day jobs too. Potential approaches include updating the pharma company regarding your new developments, or if things have settled down, a different strategy might be to put forward a research proposal for collaboration which may bear fruit in the future. We’re seeing a trend towards partnership agreements that include R&D collaboration, licensing, or co-promotions all in one deal. So we’re seeing larger deals that encompass multiple elements (and have larger valuations), but a smaller number of deals overall. These deals also tend to be among those companies that had previous relationships with the relevant partners. Again, you should generally aim for long-term relationships.
Ms. McMahon: In my experience, there is a greater chance of success in moving forward if there is a schedule in place. For example, the schedule should include Board meeting dates on both sides, and it should specify when patent reports are due. So you should anticipate that you will get to that second date, and you should aim to be ready to go. I also believe that biotech firms can dilute their limited resources if they get involved in discussions with 3-5 pharma partners simultaneously. I’d be interested to hear the other panelists’ views on this; should the biotech company whittle down the list to 1-2 players in order to move forward aggressively?
Mr. Lievonen: I’d like to discuss the types of questions that should be asked on both sides, during the negotiation process and in closing a deal.
Dr. Resnick: There may be some issues that differ, depending on whether the company is early or late stage. In general, the company should be willing to explore appropriate business solutions to address specific needs.
Dr. Gallen: To make a point germane to Paul’s comment, I came from the pharma side, but we are now on the small company side at Neuromed. During our negotiations for the N-type deal, we told potential partners that we weren’t interested in a co-promotion deal. A few players listened to us, but Merck was phenomenally awake and alert on this specific point, and they tailored the agreement to our needs. Then, in closing Neuromed’s new deal with JNJ/ALZA for hydromorphone (as announced in late April 2007), we mimicked Merck’s approach in dealing with our own prospective partners. We became the acquirer, and we tailored our resources and timing to them. We wanted them to start with the feeling of, “Have it Your Way” (so to speak), as promoted by Burger King. I firmly believe this was a key part of our success in driving this deal.
Dr. Resnick: I think it’s important to tell the pharma partner your dreams and goals right up front. It’s not just about the money.
Mr. Lievonen: Let’s examine the timeframe from the first conversation right though to closing the deal.
Dr. Gallen: For Neuromed, the deals with both Merck and JNJ took roughly one year. Statistics show that 14 months can be expected for deals of this nature. For our N-type program, we spent roughly 8 months in due diligence evaluation, and the remaining time was spent on developing the term sheet and contracts. Returning to Eileen’s question, for a small company, our experience demonstrates that it is possible to do term sheets with two pharma companies at the same time. We actually had due diligence discussions with about 20 companies, but this definitely cannot be done at the contract stage. So I would suggest the goal is to get multiple partners to term sheets, then pick one or two to enter contract negotiations. It’s much better to finish one deal than to almost finish two!
Mr. Lievonen: Once you’ve reached that stage, it tends to be the case that the biotech company feels there is a better chance of getting to market than the pharma side anticipates. My advice would be to structure the deal so that you achieve a win/win, i.e. by motivating the biotech team to truly succeed – and then pharma wins also.
Dr. Gallen: In our N-type deal with Merck, we didn’t end up taking the most lucrative offer. We actually left $20 million on the table, relative to the alternative deal. We believed that the greater financial return would accrue at the approval stage, along with commercial success. So the points on the ENPV scale are not as important. You should instead be looking for senior management commitment to getting the deal done. For us, the Merck team represented the right people to carry the deal over the goal line. Remember that this is biotech, which means a meteor can hit any drug on any day! Overall, you want a relationship with some one committed to your target – that is, to commercialize medicines that matter.
Mr. Lievonen: I would ask the panel now for their summary points as we prepare to wind up.
Dr. Mitchell: We have talked about credibility, having a solid data package based on development stage, how to get in the door, and how to define business relationships in pursuing partnerships. We’ve also discussed the need to think about being a partner with/for your partner (in their view), focusing on the long term, and getting down to transparency. I would like to add that to obtain information from the big pharma player, you should just go ahead and ask your questions. They will tell you if they are unable to provide an answer. This will facilitate your efforts in getting to know the playing field.
Mr. Hilson: In terms of where the biotech industry is heading, many trends are currently favourable. Big pharma is very eager to tap into the know-how and innovation that exists mostly outside pharma companies. Second, there is fierce competition, since many pharma companies want the same thing (targeted therapies, niche markets, high growth opportunities). Biotech is basically viewed as the R&D arms of the pharma industry, which acts as the sales arms.
Ms. McMahon: Every deal has risks and warts! There are two camps; those who won’t take risks and those who will drive the deal forward. The role of the biotech firm is to demonstrate how to manage the risks, so the pharma partner understands you are on top of the situation.
Dr. Gallen: You need to know what you want to be when you grow up. For example, to what stage are you willing to bring the compound, and how will this address your own business needs? You must recognize what is true, or what is not there, and maintain integrity. While you are doing this, you can be cultivating relationships with attorneys, and others in the deal-making process. You should approach pharma players systematically – don’t make assumptions about their interest; use your non-confidentiality materials relatively broadly, and let them tell you their interest. Be thorough in your due diligence and negotiations, and once the deal is consummated, be a great partner. Don’t be the kind of people they don’t want to work with; be reasonable and rationale – this is within our control. Science and nature are not under our control, but do the best you can. Success comes down to the choice of people as partners.
Dr. Resnick: Everyone wants successful products and financial return. In seeking partnerships, pharma companies primarily focus on relationships.
Mr. Lievonen: I want to thank our panelists; I do appreciate their advice, thoughtful comments and engaging dialogue. They’ve had lots to say, and personally, I’ve learned something this morning. I hope the audience has also gained new perspective. Thank you for joining us, and I look forward to a great conference at BioFinance 2007.
Mark Lievonen, Sanofi Pasteur Limited
Mark Lievonen is President of Sanofi Pasteur Limited and a member of the company’s North American Board of Directors. Mr. Lievonen is currently the Chair of the Board of the Ontario Genomics Institute and Vice-Chair of the Ontario Institute for Cancer Research and YORKbiotech. He is a member of the Board of Directors of Oncolytics Biotech Inc. and BIOTECanada, where he served as Chair from 2000 to May 2003. He was Chair of the Steering Committee for the BIO 2002 International Conference which was held in Toronto. Mr Lievonen has also served on a number of industry and community boards and councils such as the BIOCouncil, an advisory group to the Government of Ontario in biotechnology, and as a member of the United Way of Greater Toronto Cabinet chairing the Health Care Division. He holds a BBA in accounting and an MBA in finance and marketing from the Schulich School of Business, York University. He is a Chartered Accountant and received his designation in 1981 while working with PricewaterhouseCoopers.
Christopher Gallen, Neuromed Inc.
Dr. Christopher Gallen is President & CEO of Neuromed, a biopharmaceutical company developing a new generation of chronic pain drugs. Dr. Gallen has an extensive track record in clinical development and has been instrumental in commercializing several drugs. Dr. Gallen was most recently Vice President and Chief of Operations, Clinical Research and Development at Wyeth Research, in charge of global clinical operations. Prior to Wyeth, Dr. Gallen was VP of Clinical Research at Pharmacia and was responsible for overseeing global CNS development and clinical operations for all specialties and clinical research in the Western Hemisphere. Previous positions include President of the CRO division at Premier Research Worldwide, where he was a key contributor to a successful IPO, and Senior Director of Medical and Scientific Services at Quintiles International Clinical Research Corporation. Dr. Gallen received his M.D. and Ph.D. from Emory University School of Medicine in Atlanta, Georgia and trained in Psychiatry at Stanford and Neurology at UCSD.
William Hilson, EMD Serono Canada Inc.
Mr. William L. Hilson joined Serono Canada Inc. in June 2003 and holds the position of Director Finance. His responsibilities include the finance and administration activities for the Canadian operations. Prior to joining Serono, Mr. Hilson worked in positions of increasing responsibility at Hemosol Inc., including Manager Corporate Development and most recently Director of Finance. Mr. Hilson is a Chartered Accountant in the Province of Ontario. He worked as a Senior Accountant at Koster, Spinks & Koster in Toronto where he specialized in tax and corporate structure. He holds a Master of Science degree in Clinical Biochemistry from the University of Toronto, and completed his research in Neurosciences at the Hospital For Sick Children. He received a Bachelor of Science degree in Honors Genetics from the University of Western Ontario, London.
Eileen McMahon, Torys LLP
Eileen McMahon practises exclusively in the areas of intellectual property and food and drug regulatory law. She is one of a handful of Canadian lawyers who advise on regulatory clearance and intellectual property protection of products. Eileen is a registered patent and trademark agent in Canada and the United States. Eileen’s experience includes strategic advice on identifying intellectual property and regulatory assets; obtaining and maintaining market exclusivity using intellectual property and regulatory laws; exploiting intellectual property assets; and enforcing intellectual property rights. Eileen has a B.Sc. (Biochemistry and Chemistry) from the University of Toronto in 1982 and an LL.B. from Osgoode Hall Law School, York University in 1985.
Jim Mitchell, Hospira Inc.
Jim Mitchell received his Ph.D. in Biochemistry from Iowa State University in 1979. During his 28-year industrial career, he has held various R&D and Operations positions in 6 different companies, including his current position as Vice President Pharmaceutical R&D at Hospira, Inc. Jim holds several patents in the areas of drug delivery and protein chemistry and has been directly involved with the successful development and launch of over 50 proprietary and generic products. He has and continues to serve on several advisory boards and has worked at the state level to foster the funding of innovative research across a broad range of technology-based products. His multi-company R&D and management experience, ranging from drug discovery through commercialization, provides a unique prospective related to the balance between innovation, resource utilization and R&D cycle times in achieving sustained earnings growth.
Paul Resnick, Pfizer Inc.
Paul Resnick is Senior Director of Strategic Alliances at Pfizer Inc. Dr. Resnick is involved with networking with leaders from biotechnology companies, universities, research institutions, and venture groups to gain early insights into emerging technologies, potential product pipeline, and novel therapeutic targets that align with Pfizer’s interests. Dr. Resnick earned a Doctor of Medicine from the Medical College of Wisconsin and Master of Business Administration from the Wharton School of the University of Pennsylvani
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