Pharma Partnering 101: Dealmaking Basics for Scrappy Scientific Startups
The end customer for many biotech firms is often a larger biopharmaceutical company looking to build their pipeline or technology capabilities. It is quite rare for a small biotech to be able to bring its own products all the way through commercialization, so partnering a drug almost always lies along the critical path to success. For biotechs with a broader platform, there is the potential for partnerships or collaborations using the platform to build de novo assets.
Of course, the later in development of the partnership, the higher the value paid. A late-stage clinical compound is worth much more to a pharma partner than the same asset in a preclinical form, given the significant reduction in risk. Because of this, a key decision in partnering lies in trading a lower value deal today vs. a higher value later in development while incurring financing dilution, risk, and time.
When to Initiate Discussions
There are diverse opinions and strategies on when to begin partnering activities. The decision depends upon the amount of equity in the company, its stage, the types of investors, and the nature of the asset(s) and platform. Very well-funded (i.e. VC-financed) firms with broad capabilities may spend a couple of years laying the framework of a pipeline and building up the platform before initiating partnering; others may start the process much earlier. Well-supported firms expect agreements with high up-fronts while scrappier firms may have to settle for more modest early deals.
There is a tension between making technology/development progress to pitch a more advanced, de-risked asset vs. going out earlier with a more precarious, less developed story. For some scrappy biotechs, the reality of thin funding is that there isn't a choice - you may need to be out there now, shaking every possible tree for funding.
Critical to this question of "when to engage?" is to recognize that pharma companies - large and bureaucratic - are very slow-moving and cannot typically make decisions quickly. From the earliest discussions to the term sheet and finally onto the definitive agreement, deal-making can easily take 6-12 months. In the case of Siamab, we had ongoing updates and discussions with our eventual partner on and off for 4 years until things started to heat up. We finally moved forward with a deal in the 4th year of the relationship. Over time, a pharma's priorities and strategy may change and people's careers progress, meaning that you may be re-introducing your company and technology to new business development and scientific leaders over the course of a multi-year relationship.
Key Roles Inside Pharma
It is helpful to understand how Pharma is structured and some of the key roles you may find in your conversations:
Scientific Leadership - Later stage clinical asset deals may be driven by more business-focused company leaders/MBAs who are thinking about revenue, sales, pricing, and value, but for early-stage technologies, preclinical assets, and development platforms, scientific pharma employees play a critical role in finding, vetting, and championing partnerships. In these early-stage proceedings - the deal space where most scrappy startups live - it is essential to have an internal scientific champion at your potential partner to advocate for your technology and vision.
BD Scouts – Scouts are often PhDs who were in the lab earlier in their careers. They are charged with the first steps of finding new, cool opportunities and doing first pass evaluations. They will quickly loop in content experts from within the organization and typically have a strong internal network within their company. The best scouts can "speak science" but also understand how deals get done and the best structure to move a deal forward. In some cases, the scout will take early deals all the way through close, in others, there is a handoff to a dealmaker.
BD Dealmakers – A role often filled by MBAs, sometimes by lawyers, dealing with the nuts and bolts of moving a deal through to closure. Dealmakers may take over a deal after preliminary vetting and diligence and begin work on a term sheet. Some dealmakers are scientifically oriented, while others rely more heavily on technologically educated colleagues.
Senior Management - Depending on the relative size of the deal and the partner, you may or may not interact with senior management. They are, of course, always there in the background, and it can be helpful to learn what deal sizes require what level of approval (VP, CEO, Board). The scouts and dealmakers should be very familiar with the agreement and approval process of their company.
Legal and Finance – As soon as term sheet discussions are started, lawyers are looped in, both internally and externally. The BD team may shield you from the legal team, though once the definitive agreement is negotiated there will likely be calls between the BD teams and the attorneys from both sides. Financial representatives may become involved in structure/economics/tax issues.
How to Reach Out
Using your network to facilitate warm introductions is always the best way to meet a potential partner. Given regular turnover inside many pharma companies, it can also be helpful to use large networking events to initiate and reinforce professional relationships - JP Morgan, BIO, Bio Europe, and other conferences can be an easy place to meet mid-level BD execs and scouts. MassBio offers periodic "pharma days," where members can apply to set up a 1-1 meeting with a pharma that is visiting with a BD team on a specific day. Incubators, where many early-stage biotechs set up shop, will periodically invite pharma BD executives to network and visit with incubator member companies. An example of this right here at LabShares is our monthly lunch and learn, Lunch@LabShares, where execs present on their role and set aside time to network. Scientific execs will often visit key scientific conferences (i.e. AACR for oncology) and poster presentations are a great way to facilitate informal conversations.
A key point to remember is the value of multiple points of contact - in a large organization with multiple priorities, different scouts and BD execs may have different, and evolving, perspectives; you shouldn't assume that one conversation or one relationship is sufficient.
What should you share?
All scrappy startups should have an ever-evolving, non-confidential, pitch deck. This deck should provide introductory insight to your company and science, show enough data to be credible and generate interest, and otherwise demonstrate credibility (team, SAB, founder, publications, previous partnerships, etc...) A good intro non-con deck should be 20-30 slides - not more. The goal is to generate enough interest that the pharma requests more info under CDA. Your IP counsel should review the deck to make sure you are not disclosing anything prematurely. In many cases, with good IP protection, the difference between the confidential deck and a full non-con deck may only be modest; however, it is an important step to get a pharma to move to a CDA and it can be well worth leaving out key data from the non-con deck for use post-CDA.
In the early days it can be hard to decide how much to disclose, and also how open to be about what is working and what isn't yet. You must assume all will be discovered during diligence, so it is best to get ahead of these issues and be as honest and open as you can. The structure of “we can do X, are still working on Y, and our plan for Y is as follows” is a credible way to frame the situation. Presenting a detailed pipeline of how you plan to meet the next milestone is both an excellent source of credibility as well as a possible start for a collaboration effort - the pharma may want to wait for your “Y” step to come to fruition or may offer to participate in the process of getting there.
Finally, be sure you are not only pitching and selling but equally asking and listening. Find out what matters to your potential partners - what problems do they want to solve? What gets them excited? What data would help convince even their more skeptical colleagues?
Types, Benefits, and Drawbacks of Early Deals
The range of types of deal structures between pharma and biotech are broad - investments, collaborations, licenses, acquisitions are all possible. Typically, the scientific status, needs, and goals drive deal structure and it is best to spend more time on the science, the plan, and the details of who will do what, and then let the structure emerge. The more there are early conversations with a room full of nerdy scientists from both companies getting excited about the technology, data, and plan, the better!
Benefits of early pharma deals for scrappy startups are clear - they can provide cash and credibility, and in some cases, expertise and resources to complement your own. Pharma deals are a form of funding that is sometimes called "non-dilutive" - this is a misnomer. They are dilutive in a different way than equity is - by diluting products and pipeline and giving up some of the future proceeds for cash today (and maybe milestones and royalties tomorrow.) Given the rare but wonderful occurrence that both options are on the table, it can be interesting to evaluate the equity dilution from an investment vs. the product dilution from a pharma deal – but in most cases, a scrappy firm will see a single term sheet at a time and rarely can get a competitive situation going.
Early deals, however, are not without their own unique drawbacks. An early-stage company with modest funding can have a difficult time driving a high valuation - the pharma partner will know roughly your funding history and resources and will suspect you are cash poor. Your negotiating leverage - your "BATNA,” best alternative to a negotiated agreement - may be limited. If you have to sell off your "first baby" too early to fund your second, you can end up feeling like you are running in place.
Working With your Legal Team & Controlling Deal Costs
Pharma partnering deals are long, complex and expensive. The legal expertise required is quite specialized and partners in biotech-savvy firms can charge $600-1000/hour or more. It is critical to have a good relationship and open conversation with your lawyers, and cost management is essential for scrappy startup deal-making. A good biotech lawyer will uncover dozens of issues that ideally would be resolved in the final agreement. You may be only able to afford to negotiate the top 3-4 issues that really matter and might have to accept that your first deal may not be the deal you'd do with a much larger budget. A lawyer that can help you carefully prioritize issues is essential, and a pharma partner that can work with you in a similar capacity makes life much easier. Early in the deal-making process, it is imperative to understand your partner's priorities, constraints, and "3rd rail" issues - you may be surprised by what is driving the negotiation at various points.
Partnering is a critical aspect of biotech product development, and relationships are the foundation of deals. Building them can be well-worth the multi-year investments needed to ultimately bring forth that essential deal or rewarding exit. So get out there, network, and begin to lay the groundwork for your next deal!