Dealmaking 102 – Know Thyself (and Your Partner and Deal Team)
Getting a pharma deal done is a critical growth step for any biopharmaceutical startup. In a previous post, I discussed a number of the preliminary steps in building relationships with potential partners and developing strategic interest in your assets/programs/platform.
In this and the next couple of blog posts, I will discuss negotiation strategies, the steps needed to bring a deal to closure, and post-closing activities in greater detail. This post will focus on key steps in preparing for negotiations. The next two posts will discuss term sheets and negotiating the definitive agreement.
Critical First Step: Know Thyself
The first key element of successful deal-making is a detailed understanding of your company and its goals, needs, and constituents that may play a role in the deal process. What are your must-haves, top goals, and tradable points? Some elements of the deal are make or break – you should walk away if you can’t get them (though they should be few, specific, and realistic.) You certainly should have other goals for the deal – which can be specific and less realistic – as long as you expect to win on a subset. Knowing deal comps is essential – what else is really happening in your area with companies like you? What is realistic to expect?
The second part of “knowing thyself” is being carefully aware of all key constituents who may play a role in the deal. Your board is an obvious starting point; they need to be brought along through the entire process. Particularly with scrappy, angel-financed biotech startups, board members may have less experience and have deal expectations informed by headlines of billion-dollar biobuck deals. You need to help your board learn about and set realistic expectations for the deal. Facilitating conversations about the goals above – including setting dollar value ranges – can be very helpful.
Another key part of knowing thyself is keenly choosing your “deal team”. At Siamab, we had a board consultant with extensive industry experience, our board chair, and me (CEO) as the internal deal team. This was very helpful throughout the deal – the consultant brought another strong, experienced voice to the conversations and often offered valuable and contrasting opinions to balance me. The board chair was an excellent third voice in negotiations, and essential in communicating with the rest of the board.
The internal deal team was complemented by our corporate counsel and deal attorney, as well as our IP attorney; in all, the extended deal team was comprised of close to 10 people on our “side of the table.”
Other deal constituents include key employees who may contribute to scientific or business discussions. In many collaborations, detailed program plans and budgets will be created and negotiated. Third parties that may be impacted by or involved in the deal may be part of the extended team as well.
Finally, negotiation theory recommends close familiarity with your “BATNA” – the best alternative to a negotiated agreement. If you do not close this deal, what is your alternative? How essential is this deal to you? Being clear about the BATNA with your deal team and board is an important part of deal negotiations.
Knowing thyself well, and well in advance of deal negotiations, will facilitate moving a deal to close in many ways. The process is always a long and complex one – so having your team assembled, and your BATNA and goals clear, can expedite things.
Know your partner
As much as you must “know thyself”, you want to know as much about your partner as possible. Typically, as a much larger and more complex entity, your partner will have several people you will meet and engage with and many more that will not be directly visible to you but will have an influence on the deal. Scientific champions and BD leads (detailed in my previous post) will be front and center, and building strong, trust-based relationships with these key players is integral to a successful negotiation. Part of your goal in the pre-deal relationship-building phase is to learn as much as you can about the partner, strategy and current situation. Some important considerations are listed below.
For your scientific and BD leads:
What has their career path been? How long have they been in these specific roles? What is their previous experience with deals and partnerships? What has gone well, what hasn’t, and why? What motivates them personally and how does deal-making fit into their specific career and company goals? Spending time outside formal meetings – meals, 1-1 coffee, etc. – can be a big help here to learn these more personal motivations in the pursuit of developing a positive interpersonal relationship.
For the partner company as a whole you can research key topics:
What deals have they done recently? Which are the most comparable to what you are proposing? How is their stock price? Pipeline? Recent news? Management shifts? Strategic announcements and changes? What has happened recently that may affect and give insight into how senior management thinks about deals? Some of these questions will be knowable with web research, but it is also helpful to talk through these topics with your scientific champion and BD leads.
The Deal Team - Roles
As mentioned above, a strong deal team at scrappy startup includes the CEO, at least 1 more deal expert (another colleague with strong deal experience or an outside consultant), a “bad cop” (board chair or the board as a whole), and the legal team. It is helpful to have the bad cop during negotiations – you can discuss the deal with your BD counterpart at your potential partner but then can request time to discuss points with your board. This allows you both time to reflect, analyze, and find a way to push on certain issues while “blaming” your board and preserving your own personal negotiating capital. This approach must be used sparingly of course, but it can help minimize conflict during negotiation sessions.
Another team role – the BD executive or consultant – can also be helpful in participating in critical deal calls and negotiations. They may pick up on things you missed and can offer a fresh, alternate perspective on what you heard. Having a well-informed sounding board can be a strong asset during the negotiation.
Your lawyers will participate in some, but not all, calls and should be used strategically. Attorneys will often focus on more technical issues that may or may not be high priorities for your firm, so you will need to work with them on priorities (more on this in a future post). At other times it can be helpful to suggest a focused lawyer-lawyer call (without the BD present) to resolve a set of lower priority technical issues.
A note on your legal team – pharma deal-making is an area of intense specialization. Although scrappy startups may begin life using a small/generalist firm without deep biotech expertise to set up the corporation and do the first financing, it is critical to work with a firm with extensive experience at the time of the deal. There are too many nuances to the definitive agreement to risk working with a firm that hasn’t seen hundreds of these.
Concluding thoughts
A pharma deal can be transformative to your company, and at times can lead to an exit, making it well worth investing the time to prepare exhaustively for the exciting and challenging deal-making process. Knowing your company, constituents and your partner well is essential. Then assemble a deal team with the right people to maximize success. The next post will discuss your first term sheet!