A simple question plagues every deal maker – ‘Is this a good deal?’ Often it’s a matter of perception, viewed in the context of similar transactions or comparable companies. It can also be evaluated financially with a variety of methods incorporating discounted cash flows and probability adjustments. But, when it comes to truly assessing deal merits, the evaluation becomes much more complex as we take into account the strategic nature of the deal, which may involve non-financial elements that significantly contribute to the long term value, and ultimate success, of an emerging biopharma company. Nevertheless, we find that there are some basic elements that are key to establishing, building, and maximizing the value of a deal.
Building a commercial assessment and telling the story
(You can read a recent blog post dedicated entirely to this subject here). In short, a thorough commercial assessment showcases a robust understanding of the opportunity, specifically highlighting key market variables and preempting questions that will arise during diligence that could otherwise hold up a process. The resulting storyline positions the product and provides necessary inputs to support modeling and alignment between parties.
Pursuing multiple tracks and creating a competitive deal environment
(Again, this is a topic we have addressed previously here).While it would be great to always have more than one bidder for a deal, in actuality most deals are fairly specific to the buyer and consummated as only a one-off negotiation. There are other ways to create the sense of competition, and a multi-track process which entails alternative partnering or financing options can create a horizon or sense of urgency for a particular deal or partner. Beyond a multi-track, it is important that you define a process, even if it is somewhat fluid at the start, that provides parties with a timeline to complete diligence, submit terms, and negotiate the definitive agreement.
Understand the landscape and build a dialog over time with milestones
Early in the process it is important to ask some questions of your prospective partner.
1. First, what is their current strategy and how does your opportunity fit a need?
2. Next, what types of transactions or deal structures have they favored recently?
3. And then, who are their stakeholders and what type of a process do they use for deal making?
These are all important pieces of information that will facilitate a smooth process with well managed expectations for both sides. It is also very valuable to build the dialog in anticipation of milestone events. While some deals can come together at a single event horizon, the best deals are typically the product of well-developed dialogs over a period of time. But often times sellers have unrealistic expectations of how quickly a process can be run, much to the detriment of the deal value. Instead, it is best to work around very concise updates that help to build the story, and the momentum, towards a 6-month period when you actively pursue deal discussions. This allows you to field the maximum number of prospective partners in order to create a competitive deal environment.
Last but not least, remember the non-financial aspects
There are several other aspects of maximizing a deal value that are difficult to quantify from a term sheet. Some partners may be better equipped to develop or commercialize your product, pursuing activities in parallel that may shorten the time to market, or investing earlier in commercial activities that may increase the sales ramp. These aspects won’t show up in the announced deal value, but they will make a large difference in how you value the deal.
Similarly, there are often true non-financial aspects that can provide significant long-term value to a company. For example, working with a partner that can provide intellectual capital to extend and expand your organization can play a significant role in forward integration.
And finally, the last point to consider is the termination and reversion aspects of the deal. Some of the greatest successes in the history of biopharma have been made with products that were partnered multiple times. For development stage assets it is very much the norm to have full reversion following termination, and in the non-zero probability that your partner may shift strategic focus you will want to ensure that you can continue forward, unencumbered, with your assets.
All of these aspects are important to understanding the total value of the deal, and the robustness of process is what will ultimately assure you and your stakeholders that you have maximized what the market is willing to bear. If you would like help thinking about how to maximize value for your company, please contact Locust Walk.
Written by Michael McCully