Time Will Kill Your Deal…but in Deal-Making, Timing is Everything (Part One)

For the moment, let’s put aside the en fuego (but soon to combust?) nature of the biotech IPO market and parallel frothiness (but for how long?) of orphan disease drug development. Our recent transaction efforts stimulated some thoughts on the impact of time, and more importantly for this and upcoming posts, timing, on deal-making in pharma. While it would be challenging to disagree with conventional thinking that “time kills all deals”, we believe that timing – in particular for partner outreach and upcoming program milestones – are critical but perhaps not entirely obvious factors in successfully executing a deal with pharma. Let’s look at the importance of the first element in timing – partner outreach – in the context of early-stage biotechs.

In our view, too early is better than too late for conducting partner outreach. This point stems from the overall corporate strategy of a biotech regarding partnering. Early in its existence (let’s assume an early-stage company), a biotech should have the difficult and often heated internal dialogue among management and its Board regarding the company’s objectives (“are we a go-long platform company, asset play, or something in between?”). Follow-on discussions should then focus on financing requirements, which will strongly influence how the biotech shapes its intent and rationale for partnering. Practically speaking, if a biotech starts too early with its pharma outreach, it will spend a lot of time hearing from potential partners that it is “too early”.

But, what defines too early? Most commonly it is an absence of robust, reproducible data from a so-called “killer experiment” that is meant to show that an asset or technology has strong potential and which can be used to engage a buy-side pharma champion’s interest. Do not miss the opportunity in these early interactions to solicit feedback on what “the killer experiment” looks like from the view of potential partners. Asking questions, listening to partners, conducting studies (if reasonable, recognizing financial limitations), and delivering the data will considerably improve your probability of success at engaging these same partners in future. Just as important, these initial discussions are the first steps in relationship-building, a necessary prelude to doing the actual dance, once a deal looks to be coming together.

One additional aspect of this flavor of outreach is that it does not propose the biotech is looking to do a deal now, but rather is meant to introduce the company and team, and discuss with partners a credible timeline for adding value to the program, and decreasing risk along the way. Then, if and when the biotech has achieved clear milestones, increasing value and reducing risk, as discussed with partners earlier, it benefits in two substantial ways – 1) the biotech improves its credibility as the team delivered what it said it would deliver, when it would deliver it, and 2) the biotech avoids being labeled as “too early for a deal” (i.e., if the biotech doesn’t ask for a deal, then pharma can’t pass!).

On the flip side, if a biotech starts too late, it may have missed the opportunity to gather feedback from partners on their preferred “killer experiment”, and ends up conducting the wrong study, at significant costs in both money and time. What constitutes the “wrong study” in the view of the buy-side pharma? It varies from partner-to-partner but most often falls into one or more of the following buckets – wrong model, wrong dose(s), wrong choice of controls (positive/negative/vehicle), or wrong endpoints. Biotechs need to keep in mind the customer of their data – is it a pharma partner or does the biotech intend to bring the program through development on its own? Whether the former or latter, the biotech should fully understand, and be able to explain, why it conducted the studies that it did, and which of these activities it believes are generating the most value for the investment.

By way of true-life example, a biotech company (remaining nameless) developing a potential first-in-class drug candidate had ongoing internal discussions about whether it should conduct what it believed to be the “killer experiment” in a preclinical model. The management team at the time believed that if the data were negative from the study that the program would be “killed”, and possibly the company as well. What this biotech did not know was whether its perception of the “killer experiment”, and potential value driver if the study was positive, was consistent with that of potential partners because the biotech did not bother to ask! Eventually, as the drug candidate advanced into the clinic, the biotech recognized that it could no longer ignore the elephant in the room. Under a revised strategic guise of “we intend to develop this drug to the point of clinical proof-of-relevance and then partner it, so we would like to get your thoughts on the most appropriate studies”, the biotech reached out to several potential pharma partners and had many thoughtful, productive discussions about the data package that the future buyers wanted to see. In the end, was the “killer experiment” included in the wish list? Yes, by every company. And did the biotech do the study? Yes, and it was positive (at least in the model). Did a deal get done? No, but the relationships are solidly in place. And ask again next year after the clinical data emerge from the proof-of-relevance study that the buy-side wanted to see.

So, what’s the take-home message here for the early-stage biotech? We believe that once the strategic objectives are laid out and provide a framework for partnering, that early-stage biotechs begin to initiate relationships with potential partners sooner rather than later – and not from the position of asking for a deal. This approach will help the team build credibility and trust with the buy-side over time, as well as potentially provide relevant data that eventually can be used by the buy-side pharma champion to justify doing a deal.

In our next post, we’ll discuss the importance of the second aspect to timing in deal-making mentioned at the outset here – upcoming program milestones, and how to utilize them to accelerate to deal close.