Magazine Article | April 30, 2012

Top 10 Pitfalls Of Life Sciences Partnering: Part 1

Source: Life Science Leader

By Wayne Koberstein, Executive Editor, Life Science Leader magazine
Follow Me On Twitter @WayneKoberstein

The following is a list of “pitfalls” — actions, distractions, and missteps that can ruin a company’s chances for a successful partnership — plus some expert advice for avoiding them. This month, part one contains the first 5 of the top 10 list; the final 5 pitfalls will appear next month in part two. Generally, the viewpoint of the article is of small, entrepreneurial life sciences companies, from the early stages of searching for large-company partners through partnership selection, deal negotiation, and operational implementation. But, the list should be equally valuable as insights for the large companies that, most often, are on the other, more dominant side of the deal. Some of the “best practices” offered may seem obvious but are often overlooked in practice. Experts with a range of small- and large-company experience, as well as supporting backgrounds in partnering, contributed suggestions, observations, and advice.

1. Poor Timing — Seeking A Deal At The Wrong Stage Of Company/Asset Development
Big companies are spreading their external investments to the earliest and latest stages of drug development, leaving a large gap in between. Small companies should plan the timing of any major deal accordingly, but open a partnership dialog with large companies well in advance of the planned deal time.

Timing is all-important. Large partners will want to take on Phase 3 development at a time that is advantageous to them. Start-ups often lack the infrastructure necessary to implement early-stage deals.

Yet some innovator companies prefer to wait even longer. Jane Hollingsworth, CEO of NuPathe, says her company already has decided to complete Phase 3 trials and gain approval for its antimigraine patch before signing with any partner. “In a perfect world, you have an approved product, and then you’re really getting a lot more competition among prospective partners to obtain it. So, our Plan A is to wait until we get approval and partner at that point, because that’s when we’ll get the best deal,” Hollingsworth explains.

2. The Bleeding Edge — Failing To Adjust When What You’ve Got Is Just Not Hot
Some experts frankly observe that, if the technology offered is not the “flavor of the month” (i.e. using a mechanism or target currently of wide interest to Big Pharma), it may not matter how good it is, how much it will help patients, or how much money it could make for the partner.

“The industry is like a well-aligned flock of birds, all heading off in the same direction, despite any logic to the contrary,” says Llew Keltner, CEO of AgonOx, a developer of OX40 agonists in cancer in partnership with MedImmune/AstraZeneca. “In some cases, no amount of hard work will get a deal done, so you should consider repositioning, adding to the offering to make it ‘hot,’ or pulling back until the area gets hot.”

Historical examples include anti-angiogenesis, championed for many years by a lone researcher, before it was finally developed into an actual therapeutic drug, Avastin. Once that happened, but not before, the large companies rushed to obtain every anti-angiogenesis compound or platform in sight. Significantly, it was a large entrepreneur-founded company with many other assets that had successfully positioned and developed the breakthrough product.

“With a new scientific rationale, first it’s really important for pharmas to decide whether they want to be in the space,” Sudhir Agrawal, chairman of Idera Pharmaceuticals, says. Idera began developing compounds targeting toll-like receptors (TLRs) long before they held wider interest. “Once they make a positive decision and look at what technologies are available in the space, we are ahead of the game, so the dialogue can start. But some of the companies might wait to mitigate the risk by having more data in hand, and that’s helpful to us in making our own choice of potential partners.”

3. Naïve Negotiating — Paying Too Little Attention To The Details Of Deal-Making And Deal Terms
Small life sciences companies may let enthusiasm for their native science and technology blind them to business factors critical to finding the right partner and negotiating favorable deal terms. “It’s imperative to set and stick with agreed milestones. The drug development business is a high-risk, high-return business, and the investment-relationship philosophy should reflect this by incorporating the same discipline as if one were investing in stocks with varied volatility and return profiles,” says Paul Coggin, principal at the consulting firm Wipro.

“Relying on generalizations and assumptions to form the basis of a relationship can establish artificial barriers early in the process that are difficult to eliminate later,” adds Mary Lynne Hedley, Ph.D., president, chief scientific officer and cofounder of Tesaro, a biopharma company that is developing licensed-in oncology drugs. “A small innovative company may bring to the table the belief that large organizations are incapable or unwilling to move quickly or unconventionally to advance drug development. A larger organization may have a preconceived belief that an innovative company is incapable of managing a development program that meets the requirements of regulatory agencies. In reality, the best relationships are those that encompass a whiteboard of ideas, equality in rendering those ideas, and a focus on progressing in the fastest, smartest way to reach a common goal.”

Keltner takes a tactical view for small companies: “Partnerships are the result of sales — an innovator selling itself, the company and its assets, typically to large potential partners. The potential partner is a customer and must be treated like any customer: Know their corporate and personal needs, fill those needs, create trust at all cost, send flowers to the executive assistants and secretaries, and so on. Sales 101.”

At the same time, remember that a good salesperson is well prepared. Always have a deal ready to go before approaching the target. Companies fixate on “term sheets,” but those are just tools for generating and speeding up negotiations; trying to fashion them into stand-alone legal documents can waste months. Go right to agreement drafting and negotiation if both parties are serious. Don’t make up values — get average values for the best comparisons, and derive the deal terms from these. It is much easier to arrive at a reasonable deal when using industry standards as a base rather than having to defend created valuations.

For similar efficiency on the compensation side, avoid confusing cash and equity. With most big pharmas or big biotechs, partnering/licensing and equity investment decisions are made in much different functions of the company, in much different ways, and the equity process tends to cost a lot of effort for little reward. If equity investment has no particular value, say, as a hefty stake in likely future sales, don’t ask for it. Just go for the cash.

For nonfinancial terms (e.g. how IP will be pursued, who will do pharmacovigilance, how meetings will be held, how communications will be done, how financial/sales data will be shared, etc.), never agree to provisions in a legal agreement, due to time or cash or other pressure, that are literally impossible to execute. If the potential partner is serious, they don’t want that either. Do the slogging in negotiations and get the terms to the point where they can be carried out.

4. Flawed Execution — Neglecting To Recognize And Fulfill Business Obligations
Once the deal is signed, don’t let the euphoria distract you from what the deal terms and operating as a company obligate you to do. Virtually every partnership is complex, and the agreements are usually full of both obvious and arcane requirements. Manage the details of compliance using the best methods of project management.

Erin Brubaker, VP, worldwide business development alliance management (AM) and head of the AM Centre of Excellence, GlaxoSmithKline, says, “Alliance Management plays a pivotal role in enabling the flawless execution of a collaborative partnership, by proactively identifying opportunities to execute more effectively, enabling efficient decision making, removing barriers that impede the collaboration, and fostering a culture of collaboration.”

Brubaker’s large-company perspective is reflected by a small-company executive, Jason Rhodes, chief business officer of Epizyme, which is developing a platform of small-molecule histone methyltransferase (HMT) inhibitors and screening technology — with GSK as one of its partners. “In 2011, we put in place a robust alliance- and project-management function that enhances our partnering ability. Given the scope of what we’re doing, the number of programs combined with the fact that we have two corporate partners and two foundation partners, it really became necessary to have more structure and planning around those activities.”

Founders of start-ups — especially those with science-only backgrounds — tend to see income from the partnership as pure research funding, forgetting other obligations such as debts and taxes. You must be sure to pay all suppliers, if possible, at the optimum time in the tax cycle, as well as regular federal and state government income taxes on up-fronts and milestones.

Before getting too far down the road on deal terms, get very concrete advice from an expert tax counsel on how the deal should be structured so that payments either offset losses or can be treated as long-term capital gains. If that means changing your corporate structure or amending existing license/IP agreements, do it. The tax differences can be huge.

Keltner offers another expert tip: “Do not allow transaction attorneys to operate without constant supervision. They may be very good; they may provide invaluable advice; but they don’t know the business as well as the principals, and it is not their business or financial risk. Stay fully engaged. Do the work. Sit in on the meetings. Help argue the points. Read the documents. Understand the documents and their ramifications.”

5. Value Conflation — Confusing Milestone And Other Conditional Payments With Real Money
Headlines typically announce new deals with a total value, which will only manifest if the innovator partner meets very strict conditions. The words “up to” are usually missing from the copy. Some companies now deliberately keep financial terms confidential to avoid misperceptions of its deal values.

Whether or not releasing financials misleads the headline readers, small-company partners may also mislead themselves into seeing total deal dollars as ready cash. Arguably, such a mentality could have consequences such as creating a false sense of security in the company and possibly causing it to take its eye off the ball. The effect may be subtle, because both partners should be well aware of the financial terms, but it is nonetheless a hazard.

See part 2 here.