Licensing and M&A deals are an essential part of the success, lifeblood and motivation for small biopharmaceutical companies. As large and specialty pharmaceutical and biotech companies continually strive for innovation, there are powerful financial incentives along with a strong desire to help patients that often lead small biopharma companies to seek strategic partnerships. Three common incentives for strategic partnering are:
Access to capital: Non-dilutive financing preferable to selling equity
Access to capabilities: Leveraging established R&D, clinical, regulatory, manufacturing, commercial and / or geographic expertise more effective and capital efficient than building it
Liquidity: Up-front consideration and structured payments upon success create a path to a financial return for investors and strong incentive for employees
At Locust Walk, when we advise a client on a sell-side process, a common question often arises once there is interest expressed in the technology – should the seller provide specific deal guidance to the potential buyer(s)? The instinctive trade-off in answering this question is that if a company provides specific guidance it runs the risk of “leaving money on the table” or “negotiating against itself” without knowing what the buyer is willing to pay. On the other hand, if the seller does not provide guidance, it runs the risk of receiving a low-ball offer that is far different from what it is expecting.
As with most complex questions in business, in order to answer the question of whether or not to provide guidance, there are several other questions that the seller should be addressed first:
What is the company strategy?
Build a sustainable, independent, fully integrated company?
Focus on a specific geography?
Validate the platform?
Monetize one asset to fund the development of another?
Exit at the optimal value inflection point?
What is the value of the underlying asset(s)?
What is the target product profile?
What unmet needs will be addressed?
How large is the patient population based on segmentation analysis?
What do the treating physicians, payors and patients think about the product concept / data?
What assumptions are informed by market inputs and realistic to use as the basis of a revenue forecast that the buyer(s) can believe?
What is the seller seeking?
What is the desired deal structure?
What, if any, rights does the seller want to retain?
What deal terms does the asset justify based on valuation analysis, deal comparables, return on investment analysis, etc.?
What is the best alternative to a deal (i.e., equity financing, capital allocation trade-offs, alternative funding sources, kill the program)
What is the level of competitive interest?
Multiple bidders or a single interested party?
In-bound interest vs. solicited interest?
Strategic fit with buyer(s)?
By systematically assessing these questions, Locust Walk has found that our clients are then better positioned to appropriately address the ‘guidance vs. no guidance’ question. At a minimum, we always advocate that the seller in a biopharma deal create a structural term sheet that clearly describes the transaction type, deal parameters and key areas for business negotiation that are consistent with the company’s strategy and what it is seeking. Along with the structural term sheet, we encourage that the seller provide a commercial assessment of the underlying asset(s) and an overview of relevant comparable deals to illustrate potential deal value.
Once the questions above have been addressed and a structural term sheet is provided along with any deal comps and commercial assessment information, the seller should be prepared to answer the question, what deal terms are you seeking? There is an advantage and an abundance of research to support that making the first offer can optimize deal value. The party making the first proposal will often get better terms than it will if it reacts to a first offer. The reason for this is the psychological advantage of anchoring. Whenever the first structure and terms are proposed, both parties begin to work around those parameters.1
That being said, there are certainly situations in which a preemptive bid or competitive dynamics dictate that the seller should simply provide structural guidance and allow competitive dynamics to drive deal value as opposed to anchoring towards a set of numbers. Furthermore, Locust Walk strongly recommends that our clients pursue self-financing options via private or public capital in parallel to running a strategic partnering process so it can truly assess the trade-offs of partnering vs. self-financing. The conditions of the financial markets and investor feedback are important factors in setting deal expectations and the important decision about whether or not to provide specific deal guidance. By knowing its financing options, a seller can be more confident and grounded in anchoring its partnering “ask” because it fully understands its credible alternative to a partnering deal.
For additional information on how to optimally provide deal guidance and position your company for success in licensing / M&A deals, please consider the Locust Walk Institute course on “Growing Your Company Through Transformative Transactions”, taking place on September 14th and 15th in San Francisco.
Register by August 15th to get the early bird discount.
Written by Josh Hamermesh