ClavystBio Conversations: Biotech Deal Dynamics

TRANSCRIPT:

Khoo Shih

We all know that BD and M&A is a very important part for a lot of our companies. One of the common questions when we are facing a biotech company is when should they start thinking about BD partnerships.

Luc Dochez

I think on that one, you should start thinking about it from day one. I always say as an executive, whether you're a CEO or a CBO, you need to create options for your company, and create optionality.

The one thing you control is moving forward yourself -- how you do that is to secure financing, but how you get well financed really depends on the market, on the situation, what you have. So I think having BD in mind from day one is good, but to me, it's always means to an end. It's not an end. So, if you're there and you just want to do a deal, it's often very difficult.

The advice I always give as a BD guy is I don't sell anything. You can buy anything from me. I mean anything is for sale, but I don't sell anything. And I think that's to me is the advice -- start early, try to kind of keep your own fate in your hands so that you're not forced to sell, because by definition then you're in a losing position but try to create options. If you have the options, if you have the best cards, you get the best deal.

Andreas Wallnoefer

I would say that you have to think about what we call exit windows when you come up with your business plan. If you build a biotech, you have to have a business plan, and there will be natural points where you have data packages and information that could be important and relevant for partners. Typically, these days they're around very early. There are some partners who are interested in platform deals, that's something you can consider. There is a second window typically and that's primarily for very promising innovative new approaches which is before clinical. And then today what is the trend, particularly for big pharma is that they want to see some clinical data, which typically means clinical validation. Inherently the value that you create with these three exit points is exponential so that's something you have to consider and to match with the risk that you want to take, and to Luc’s point, the optionality that you have right.

My background is primarily in clinical research. My passion is to bring molecules to clinical validation, so personally I think the most interesting point is once you have some clinical data that validates that the concept is really relevant for them.

Just to put this into some practicality, actually at the moment the deal that I'm most proud of and is most successful is an ophthalmology company called Eye Bio. And if you put this into these three points: at the candidate before clinical, and after clinical validation right, so the valuation at the time point then we had the molecule was around 20 million, the valuation before we went into clinics was about 100 million, and the valuation after the first clinical trial was 3 billion right. So of course it could have gone terribly wrong in between, but there is a reward for the courageous.

Khoo Shih

You raise a very good point. At different stages of the molecule, there’s different valuation. When did you get started talking to partners, and how do you know when to get started? Any advice for young biotech CEOs trying to get their first deal?

Luc

You know, as a young company, I always compare it to selling vacuum cleaners door to door. You really got to believe in your product. Even if it hasn't really worked yet, you got to be convinced and you got to knock on a lot of doors, and you got to speak to a lot of people. It's a constant marketing efforts and you build your networks.

In the beginning, you get a lot of no's and you know you're ignored, and you just are persistent. You keep going. But over time you develop relationships, and also what I've learned is even the young junior BD guy, 25 years ago, when I was starting on the sell side and he was sitting on the buy side, is now head of M&A at another company. Today these relationships really pay off, so my advice is be out there. You know, nobody is helped by just you sitting quiet and not going out there.

There are stories like Eye Bio which are perfect -- it's an experienced team, the band comes together, but the first time they did it, I'm quite sure they had to do exactly what I was talking about, and as always the first time is the hardest. The first term sheet for your first financing is the most difficult one to ever get. If you've done it a few times, you know, like I said, it's a people business. People trust people, they believe if you've done it before, you know you can do it again. But don't forget, everybody has to be a first time CEO. It's the same if I talk to my colleague VCs -- we want a very experienced CEO and this guy or this girl has never done it before. That's true. But nobody gets born as a second time CEO. That just doesn't happen. So I would just say be out there, build your network, talk to a lot of people.

The other thing is sometimes doing a deal also depends on if you can hold on to it to build value, then that's great because the value goes up exponentially. Every deal is different, every situation is different, so there's no right or wrong on the answer but you have to look at can I generate more value myself? Do I have a team that really wants to do this, or do I have a team of people who want to flip it? It is, you know what is the best way, the shortest way, the most… you never know for sure. As Andreas also said, that can go terribly wrong in between the different phases, and the likelihood that it goes wrong in all honesty is higher than that it goes right. We have to be honest on that --- translation is difficult, biology is difficult, so you have to take all of that into the equitation and then make a decision, and then hopefully come to a win-win deal.

Khoo Shih

You brought up a number of points. Maybe I'll start off with the part related to the team. So to get a successful M&A and BD deals, how important is it that CEO hires the best CBO? Or let's go find some investment bankers to help us!

Luc

There's a lot of answers to that question, and I think I'll just use the Prosensa example. I was a CBO with a great CEO, but the CEO was really out there and telling the story. We were a public company and he was out there saying I'm going to build the next Genzyme, I've learned from Henry Termeer, I know how to do it.

He was a commercial guy, you know, “We're in Phase 3, we got to do it!” And I was the crazy BD guy next to him “So yeah, you know, this guy

I'll sell it!” But that was a nice play toward the world, and we knew that from each other. It was like we had actually almost played double tag on it. It's hard to get a CEO that’s going to build it, and that’s really real. On the other hand, there is an openness to talk to this BD guy, so maybe if we're truly interested and we make a great bid we can still get it because there's always a balance. Like if you're too hard to get, nobody is going to take the risk to be disappointed. So this double tag play between a good CEO and a good CBO. I think was actually something that worked well. So I think both are important in these discussions.

I think as a CEO, you know, you're also very vulnerable. If you’re the CEO of the company, and you're out there only trying to sell to pharma, then it's like don't you believe in your own product? Can’t you raise money? If I'm the BD guy, That's my job. I have to try to kind of get a deal done. And so I think this interaction is quite important. You need to trust each other and really know and be very open and transparent because at the right time you really have to bring it together

Also as a team you got to be aligned because pharma will feel that if I’m the BD guy and at the certain moment the CEO keeps saying no, no, no, they're also going to say stop wasting my time, so you just have to find the right balance.

Andreas

I think we are at an interesting topic which is particularly relevant for Singapore, because let's say the message is the following -- science doesn't sell by itself, so if you are in that business and think about finding partners, the science needs by definition to be strong.

The debate about M&A and BD is largely a debate about people and social skills, negotiation skills, strategy. It's kind of a soft science and like Luc says, I mean there is not a standard recipe. The only thing which is relevant is the team. The dynamics and the team, and that's also why, and Luc can comment as an investor, probably 60% of your investment is the team and 40% is the science.

So basically, a poor team can waste fantastic innovation, and a great team can make mediocre innovation a great success. If you can have a first time CEO, then somewhere in the team you need to have some deep senior expertise. It's the way that the group comes together, and the way also how people can learn in an enterprise and then are next time even more successful than the first round. This is a whole cycle there.

Luc

Building on that, it’s also very important to realize only the team can do it.

It's very hard for somebody else to kind of make a deal on your behalf.

I've seen this so many times, that people then refer to consultants or bankers and they count on the banker to actually do it for them.

I think if I learned one thing in the in the different M&A deals, it is that a bank can be a great facilitator, they can help you to maximize the deal but they never get a deal done. So if you've not had real interest, if there's not yet interested parties with a term sheet, with a concrete offer on the table, it doesn't really help to get a banker involved in my experience because if they start calling people and the other side still has to say, “yeah, but who is that company?”, it seldom works.

What does work is you have interested parties around the table, and you want to kind of keep them honest and to a good timeline, and kind of really show that it's real -- that you have serious interest --- then a banker is a fantastic facilitator who can help you get a little bit more value out of the deal because parties feel it's for real and that you're not playing poker or bluffing or anything. That's good.

But I've seen too many kind of companies where the CEO or somebody says

“I have this great thing, I want to do a deal. Let's hire a banker.” Well, trust me-- recipe for disaster. So you can only count on yourself. You can only count on the team. You have to kind of bring the people around the table, and then they can help you optimize the deal.

Khoo Shih

So maybe we turn to the another stakeholder that is essential for the success of any BD or M&A -- the buyer, pharma or a biotech. What are the common pitfalls that you saw when they try to engage the pharma?

Andreas

I have the privilege because I was in Big pharma and involved, not in the negotiating but in the diligence of the asset side. My group did the R&D diligence for Roche for a couple of years. My advice here, having seen the interaction from both sides is you need to find a champion in a company.

Ultimately the people who are really going to go to push a deal over the line and have to champion it are the R&D guys, right? Essentially if R&D is not convinced, typically a deal is not happening.

You need to think with whom you're going to go to talk. I see many biotech companies say “Oh, we talk to AstraZeneca, they are not interested.”

And I say with whom did you talk?

You need to find champions. You need to build relationships, and then actually while you move the dialogue, also reach a certain seniority you can talk to.

Let me explain why I'm saying that, and give you some insights from the pharma perspective.

There was a couple of years I was in charge of the cardiovascular metabolism franchise. We had the strategy about what we wanted to do, and the BD guys, they got the brief. So these guys, they go to the conferences with a shopping list.

So as a biotech you need to know who is shopping for what. But very often, the more junior people that you meet at the conferences, they would never ever propose something outside of that shopping list. So it is almost an uphill battle if you try to convince them about something which is not on their shopping list.

So first of all, you need to know who is looking for what, and if you want to have an entry into a company, and I hate to say again Eye Bio an example. Merck does not have an ophthalmology department before they bought Eye Bio, so there was no point talking to any Merck partnering person because we were not on their shopping list. That's why we called the CEO directly right? And then you got traction. So you need to think how you want to approach the right people and get champions and contacts. And I would postulate not only on the BD side, but also on the R&D side to get the right momentum.

Luc

I can only agree that the R&D part is very important. Sometimes you can go to the BD angle, but then you got to be realistic as well. I've seen this also too many times where people come back and are like we had great J.P. Morgan, we had a great Jeffries, we had a great Bio Europe -- everybody said they were interested.

And I'm like, yeah, sure. If I'm a BD guy, I'm always interested in everything, and then I'll digest it afterwards. Why would I tell you up front I'm not interested?

Then I wouldn't take the meeting.

So I think that's one thing to consider -- R&D is key, and until you get to a certain seniority level, you're not in serious discussions. Once you're in serious discussions, my advice would be to be very honest, be very open. Present it as it is. Don't try to answer things or try to kind of make things look more beautiful than they are. I think they're very experienced people, as Andreas was on the other side, so if you try to BS them, it's going to fire back. It's better to say what you know, be very convinced about what you know, and then also be very honest about what still needs to happen

They know if they deal with a biotech company, not everything is going to be perfect. Also, don't be upset – you’ll always have people on the other side who initially, in their specific area of expertise, will be a bit negative because it's not up to their standards. But there's always a champion who oversees all of that.

So be direct, don't be discouraged if you get some negative feedback. It doesn't always mean the deal is dead and I think that's the thing. I've seen people trying to sugarcoat things and I think that's the worst thing you can do. It's better to be honest, better to be upfront. And I think also if you’re very confident in your product, the question I often get -- are you happy if you're in very serious discussions, if you're already like term sheet, you are talking about the magnitude of a deal that you're willing to accept, are you willing to do like an MTA?

Because I've seen that recently in pharma and I’m happy to share with you my experience there is that sometimes now before they buy, they want to test.

They want to make sure that the data you generated are real, and so they want to run it at their own. I'm like if you're confident in your own data, if you know how they've been generated, if you double tested it yourself, why not?

Best case, it goes well and the value goes up. Worst case, if it's shaky, you can always see and you have the value of your data. And maybe then you know it's not the right partner, if they really want to question it. So I've never seen a real downside to that. I've seen too many boards where people are really scared and we don't do that and blah blah blah, and then sometimes a deal doesn't get done.

This is to me also key. Be direct, be transparent, have confidence in your program and your own products, and let them test it before they buy it.

Khoo Shih

I will end up with just one question, because nobody talks about the value of the deal. How should a company think about, let’s say it’s a licensing deal. Upfront versus milestones versus the royalties? Where do you balance the value as a young company going in to negotiate?

Andreas

Luc is probably more the business guy. I’m still the R&D guy. But I think what you try to do is get as much upfront as possible.

Khoo Shih

So money now is more important?

Andreas

Yeah, so you push for the upfront.

Luc

Yeah, I fully agree. It's the only thing -- the cash in hand is what you get, because there's the development risk so buyer dollars are buyer dollars, and you don't know if you're going to get there. It's easy to count yourself rich, but you still got to get there.

Then secondly, you also hand over the project to somebody else in most cases

So what can also happen, not invented here, what is hot today in pharma and a priority two years from now -- different CSO, different CEO, different strategic vision. I've seen this multiple times before. I did a partnership with GSK. They were building a big rare disease unit -- so GSK goes into rare diseases, and three years down the road, GSK goes out rare diseases. They sell off every asset.

Two years later oh they're back, but it can be very devastating to your project to go through that downturn when it's no longer in vogue at the company.

It can still go well, and ultimately you should hope that if the data are good the company will remain focused and will deliver the asset, but you have no control over it anymore. So from that perspective, I fully agree everything you can get now is guaranteed, is assured, and that's the real value of your deal.

All the rest is very nice for the press release, but be realistic with that.

Khoo Shih

I want to thank Andreas and Luc for sharing a lot of insights about their experience in BD and M&A. From what they have said, this is really about creating optionality for the biotech companies, and ultimately what we also learned is that cash is king in order to drive the growth of biotech.