Clear, data-based financial assumptions are essential to driving a successful deal process. In a previous post, The Value of a Commercial Assessment in Supporting a Transaction, I discussed the main ways that a well-done commercial assessment can optimize both the probability and value of a deal for a seller. This simple and somewhat intuitive philosophy has proven to be true time and again in our experience, but there is more to the story that may be less obvious. Sellers are very often tempted to push (or exceed) the limits of what’s realistic when representing the commercial potential of their assets to potential buyers, but that is often counterproductive. While it certainly makes sense to present an opportunity in as attractive a light as possible, representing unrealistic commercial potential in deal discussions can often do more harm than good.
To recap the previous discussion of the value of a commercial assessment, having data-driven assumptions during deal discussions provides multiple benefits that can drive deal value and increase odds of deal success. First, it helps with sizing the pie, giving both the seller and the buyer a (hopefully similar) concept of the value that exists for the product. Second, commercial findings can be a key tool for preempting or overcoming partner objections. Lastly, well-done commercial research can provide a means to effectively position the product to the partner, as well as guide the positioning when they inevitably do their own market research. A key caveat to each of these advantages, however, is that commercial projections that are cherry-picked, unrealistic, or not backed up with real data are much less credible and effective at aligning both parties toward getting a deal done.
In short, as it will become obvious in the examples below, it’s not enough to have a compelling commercial assessment to drive your deal — it’s much better to have one that’s also defendable to provide the basis for productive deal discussions.
Success Stories and Cautionary Examples
As one example of the value of a realistic commercial projection, a small private company was looking to partner its mid-stage reformulation product. With recent solid interim phase 2 data, they believed they were well-positioned to disrupt a large and established market which was currently driven by less safe and convenient formulations. They had previously commissioned market research suggesting blockbuster revenue potential, but the market had recently shifted with the emergence of some significant regulatory and reimbursement headwinds. The market research, as a part of the preparation for Locust Walk’s partnership process, revealed reduced (but still significant) commercial potential and reflected a realistic picture of the evolving market. Updated research in hand, the company closed two highly value-adding regional partnerships that enabled funding of clinical development, which remains ongoing.
In another case, a private company was developing an oral formulation of a drug also being developed elsewhere as an IV. The company conducted market research acknowledging the target population for both formulations was relatively small, but that the oral product would clearly capture the majority of the market if both were approved. As a result, the company was acquired by the partner developing the IV drug. While there were many successful factors, it was ultimately the undeniable market research that drove the deal across the finish line.
Another example demonstrates the importance of clear value alignment between buyers and sellers, as well as the challenges that can arise when that alignment doesn’t exist. A company developing a reformulation for an orphan indication had commissioned commercial research and revenue projection for the US market, but hadn’t conducted analogous research since ex-US had a much higher level forecast for those markets. As a direct result, parallel discussions with US and ex-US partners proceeded very differently. The US commercial work was well-grounded in the niche sub-population in which the company’s product would play once approved, and the forecast with all underlying assumptions was shared with the potential US partner. As a result, the partner accepted the seller’s forecast with little adjustment or objection, ultimately resulting in an agreed term sheet that satisfied both parties. In contrast, the ex-US partner initially submitted a term sheet based on the seller’s much less data-driven regional projections, but significantly reduced the offer once they had done their own research, and a mutually acceptable ex-US agreement was never reached.
As another cautionary example, a company developing a late-stage neurology product had put pressure on a reputable third-party commercial research firm to drive up the revenue curve and represent the product as a blockbuster. Though the product was meaningfully differentiated and had compelling potential within a specific population, the output of the market research was largely viewed as unrealistic by partners. Several very compelling term sheets were produced in the deal process, but ultimately a value gap between the seller and buyer could not be bridged, resulting in no deal.
Sellers are understandably and rightly motivated to make the commercial opportunity for their asset seem as attractive as possible. As a general principle, sellers should put their best foot forward and anchor high in any negotiation process. Somewhat counter-intuitively, however, when the value represented to potential buyers becomes unrealistic or isn’t backed by real and defendable market data, it creates an obstacle to deal negotiations that is counterproductive and can kill deals. One of the best ways a seller can help themselves close a value-adding deal is by anchoring negotiations with a compelling yet realistic view of an asset’s commercial potential and value, making it more likely that a buyer will accept the seller’s view of value and drive to a successful outcome.
Locust Walk is a global life science transaction firm. Our integrated team-based approach across capabilities, geographies, and industry segments delivers the right products, the right partners, and the most attractive sources of capital to get the right deals done for biopharma and medtech companies. To discuss how we can help you assess the value of your asset as a part of the larger deal process framework, please contact Nick DeLong or Daniel Brog.
About the Author
Nick DeLong, Associate at Locust Walk