Negotiating the Deal

Negotiating the Deal:
Tactics for Execution
QB3 Global Bio-Entrepreneurship Course

Lindsay Meyer (limeyer@deloitte.com)
Deloitte Recap LLC
October 7, 2010

What’s on Tap
§ The art of doing deals
§ Different strokes for different folks
§ Now it’s your turn
§ Things you might be interested in knowing
§ Going to the drawing board
§ A final word on value creation
§ Beer

Copyright © 2010 Deloitte Recap LLC. All rights reserved.

1

Case #1 – SEATTLE GENETICS
Founded 1998
(Bothell, WA)

Cancer &
Autoimmune

325 Employees

$325M Cash

THE ASSET
Brentuximab Vedotin, an antibody-drug conjugate targeted to CD30
for Hodgkin and T-cell lymphomas


3

Why Partner?
Pros
• Enables broader global development plan
• Supplements resources for:
‒ Late-stage clinical trials
‒ Manufacturing

Cons
• Could have less control over development,
regulatory and commercial decision-making in ROW
• Supporting the collaboration might distract internal
teams from other proprietary programs

‒ Commercialization

• Increases focus on building US/Canada sales &
marketing infrastructure

• Might delay SGEN’s global commercial expansion

• Generates near-term cash flow and longer-term
milestones and royalties

• Relinquishes some long-term value potential

• Non-dilutive financing alternative

• Could reduce M&A possibilities

• Likely to provide validation and reduces future cost
of capital

• Termination of the collaboration can taint program

• May increase brentuximab’s overall chance of
success


4

Partnering Process
§ Initial Contact

35
§ Confidential Discussions

20
§ Due Diligence

§ Term Sheets

10
5
5

Deal Announcement


6

Deal Structure
Seattle Genetics
Novel, first-in-class
therapeutic
Strong phase I data
Pivotal trial fully
enrolled
Retains full US and
Canadian
commercial rights


Millennium to provide:
$60M upfront
>$230M in milestones
Pays 50% of joint
development costs
Tiered double-digit royalties
on ROW sales
Deal reduces future
financing needs and enables
further investment in
SGEN pipeline

Millennium
Global commercial
infrastructure
Flagship product
Velcade
Strong oncology
expertise
Obtains ROW
commercial rights

7

Partnering Timeline
~1 mo.
~5 months
~18 months
Jan - Dec
Due diligence

May
Partnering
process
begins

July
1st contact
with MLNM

January
Partnering
discussions at
JPMorgan

June 22
1st term sheet
with MLNM

2008
June
Preliminary
partnering
meetings at
ASCO

Nov 9
First draft of
definitive
agreement
with MLNM

Dec 16
MLNM deal
signed

2009
Nov – Dec
Partnering
discussions at
Bio-Europe
and ASH


April 6
ADC
deal
with
MLNM

May – June
Partnering
meetings at
ASCO

Dec 4
BOD approves
MLNM deal

8

Different strokes for
different folks

Case #2 - AMYLIN
Founded 1987
(San Diego, CA)

Diabetes &
Obesity

1500 Employees

$574M Cash

THE ASSET
A Basket of Obesity Drugs including: Pramlinitide/Metreleptin (Ph. II),
Davalintide (Ph. II), AC163954 (OPT), Pre-clinical compound from Takeda


10

Partnering Considerations
Challenge
• Roles and Responsibilities

• Competition Against the
Collaboration

Solution
• Divide responsibilities according
to each party’s strengths

• Employ non-compete provisions
which encourage collaboration,
but don’t limit scientific research

Examples
• Amylin controls activities
through Phase 2 in the US;
Takeda from then on and ex-US
• Takeda controls global
commercialization
• Required nomination of certain
additional analogs
• Process to propose additional
activities, free pursuit if rejected

• Changing Regulatory
Environments

• Define cost sharing for known
circumstances and a contingency
plan for unknown occurances

• 80/20 cost sharing in the US

• Decision Making Authority

• Create an environment where
mutual agreement is the norm

• Committees with separate
decision making authority

• Amylin shares additional costs
for certain clinical safety studies

• Division of “final say” authority
• Defined escalation process

11

Deal Announcement


12

Deal Structure
Amylin
3 Phase 2
compounds for
obesity
Option to license
additional
compounds
Co-promotion
option of 1st 2
products

Takeda to provide:
$75M upfront
>$1B in milestones
Pays 80% of US
development costs
Pays 100% of ex-US
development costs
Tiered double-digit royalties
on total annual net sales

Takeda
Global commercial
infrastructure
Strong diabetes
sales expertise
Flagship product
Actos
Obtains WW
commercial rights

Loan for CV safety study


13

Valuing a Deal
Discounted Cash Flow


Comparables Analysis

15

Transaction Execution
Week 1-2

Week 3

Week 4-6

Week 6-18

Week 24

Week 25

• Timing

• Process

• Contacts

• Term Sheets

• Key Provisions

• Committees

• Structure

• Targets

• Meetings

• Competing Bids

• Contracts

• Managers

• Strategy

• Sales Deck

• Follow-ups

• Optimization

• Diligence

• Optimization

• Valuation

When should we How should we
partner?
structure?
• Gap Analysis

• Target Pools

• R&D Diligence

• Structure Options

• Market Analysis

• Valuation

• Legal Diligence

• Tax Impact

Who should we
target?
• Position with
partner’s deal
negotiator
• Manage
expectations

How do we
How do we avoid
maximize value?
pitfalls?
• Process/Timeline
• Term Sheets

How do we
optimize?

• Due Diligence
Process/Timeline

• Alliance
Management

• Key Contract
Provisions

• Deal Optimization
and Revision

• Generate leads


16

Structuring and Negotiations
§ Consider role of asset in corporate development
§ Seek forward integration, company valuation, investor
liquidity
§ Have the buyer submit terms, first
§ Use rational comparables
§ Get multiple bidders involved
§ Know minimum requirements


17

Things you might be
interested in knowing

Partners of Biotech Programs
70

Pharma Company Licensing and M&A Activity
(2009)

Number of Deals

60
50

Corp In-Lic
Univ In-Lic
Out-Lic
M&A

40
30
20
10
0


Source: Deloitte Recap LLC

19

Therapeutic Focus
800

Number of Deals by Stage at Signing and Field
(2005 – 2010)

700
600
500
400
300

Disc/Lead
Preclinical
Phase I
Phase II
Phase III+

200
100
0


20

Early Stage Payment Trends Over Time
1990

1995

2000

2005

2010

Upfront

$0.1

$1

$1

$2

$9

R&D

$0.9

$7

$5

$7

$9

Milestones

$0.2

$5

$7

$33

$124

Royalty

5%

6%

8%

35%

Total Size

$0.2

$6

$9

$33

Licensing data from Recap IQ by Deloitte
2010 data through September; no royalty figures available

$138
21

Commercialization Contracts
Research & Development

Product License

• License / Sublicense
• Royalty
• License Maintenance

Manufacturing & Supply

• Manufacturing & Supply Rights
• Reimbursement
• Escape / Liability

Alliance Management

• Implementation & Management

Equity Investment


• Field & Scope
• Consideration Payable
• IP & Regulatory
• Control

• Equity Investment Types & Pricing

23

Contractual Basics
§ Field and scope
§ Governance
§ Territory and major markets
§ IP and regulatory
§ Supply and manufacturing rights
§ Financial and audit provisions
§ Term and termination


24

Must Have
§ Duration of research
§ Sublicense rights
§ Patent defense responsibilities
§ 3rd party infringement responsibilities
§ Net sales definition
§ Reimbursement basis for commercial supply
§ Reversion rights
§ Dispute escalation


25

Must Have Examples: Amylin
15.1 Objective. The Parties recognize that disputes as to matters arising under or
relating to this Agreement or either Party’s rights and/or obligations hereunder may
arise from time to time. It is the objective of the Parties to establish procedures to
facilitate the resolution of such disputes in an expedient manner by mutual
cooperation and without resort to litigation. To accomplish this objective, the Parties
agree to follow the procedures set forth in this Article 15 to resolve any such dispute if
and when it arises. […] such dispute shall be subject to the dispute resolution provisions
contained in Sections 15.2 and 15.3.
15.2 Resolution by Senior Executives. Except as otherwise provided in this Agreement
including Section 15.1, if an unresolved dispute as to matters arising under or relating to
this Agreement or either Party’s rights and/or obligations hereunder arises, either Party
may refer such dispute to the Chief Executive Officers of each of Takeda and Amylin
(or such delegate of either Chief Executive Officer who shall have appropriate
decision making authority regarding such dispute) […]. If such matter cannot be
resolved by discussion of Chief Executive Officers […] such dispute shall be resolved in
accordance with Section 15.3.
15.3 Arbitration. Any dispute that is not resolved as provided in Section 15.2 may be
referred to arbitration by either Party. Such arbitration shall be conducted in
accordance with the Rules of Arbitration of the International Chamber of
Commerce (the “ICC Rules”) as then in effect. The arbitration shall be held solely in
New York, New York, U.S.A, and shall be conducted in English […].

26

Escalation Process Deciphered
§ Obesity Steering Committee attempts to resolve, first
§ CEO referral follows
§ Arbitration if no resolution in CON days
§ Arbitration expenses shared equally by parties


27

Good to Have
§ Defined research terms
§ Non-compete provision
§ Due diligence
§ Publication delays for patent prosecution
§ Manufacturing escape clauses
§ Post-term sales rights
§ Royalty adjustments (and limits)


28

Good to Have Examples: Seattle Genetics
5.3 MPI’s Performance. MPI shall use Commercially Reasonable Efforts to prepare and
submit the appropriate Regulatory Materials for Licensed Products in the Licensed
Territory, as determined on a country-by-country basis, and to seek to obtain
Regulatory Approvals (and, if applicable, Pricing Approvals) for Licensed Products in
the Licensed Territory, as determined on a country-by-country basis. [***]:
(a) [***], and thereafter use Commercially Reasonable Efforts to [***] unless (i) [***] or
(ii) [***] (a),[***];
(b) [***];
(c) [***] and [***]; and
(d) [***].
[…]
12.4 Publications. The JDC shall prepare and approve [***] with respect to the
Licensed Product and results of studies carried out under this Agreement. Neither Party
may publish manuscripts or give other forms of public disclosure such as abstracts and
presentations, of results of studies carried out under this Agreement, without the
opportunity for prior review by the other Party or [***]. […]. In addition, the Party
seeking publication shall delay the submission for a period up to [***] in the event that
the other Party can demonstrate reasonable need for such delay, including without
limitation, the preparation and filing of a patent application.


29

A Variety of Good Provisions
§ Well defined diligence requirements (4 tiers, CON)
§ Deferral of publications for up to CON days to protect IP
§ Royalty adjustments
§ Alternate supply may be established at each party’s own
expense


30

Icing on the Cake
§ Possible extensions to research period
§ Right of first refusal to other research
§ Territory options for inclusion/exclusion
§ Co-promotion rights (if it makes sense)
§ Options to repurchase product


31

Icing Example: Amylin
5.1 Commercialization Activities. Takeda shall be responsible for
Commercializing Products in the Field in the Territory, including conducting
any Post-Approval Clinical Studies, at its own expense, subject to the terms
and conditions of this Agreement and in compliance in all material
respects with Applicable Laws. Takeda shall be responsible for all
Commercialization Costs. Takeda shall use Commercially Reasonable Efforts
to Commercialize Products in the Field in the Territory in accordance with
the Commercialization Plan and the terms of this Agreement, subject to
Amylin’s co-Commercialization of Products pursuant to Section 5.3, and the
terms of any Co-Commercialization Agreement.
[…]
5.3 Amylin Co-Commercialization Option. Subject to the terms and
conditions contained in this Section 5.3, Takeda hereby grants to Amylin an
option to co-Commercialize with Takeda the first two (2) Products
containing different clinically active ingredients that have received
Regulatory Approval by the FDA in the United States, and any additional
Products that receive Regulatory Approval by the FDA, which contain the
identical clinically active ingredient(s) as either of the first two (2) Products
(the “Co-Commercialization Option”).

32

Co-Commercialization Option Deciphered
§ Takeda has sole WW commercialization rights
§ Amylin can choose to co-commercialize the first 2
products approved by the FDA
§ Amylin must exercise option within CON of Ph. III trial
unblinding and the co-commercialization will last for
CON
§ Amylin is responsible for costs of co-commercialization,
to be reimbursed by Takeda at CON% of internal
detailing costs


33

Avoid
§ Not including the “Musts”
§ Poorly defined “Icing”
§ Your lawyer should be looking out for everything else


34

A final word on value
creation

SGEN t18m Share Price
$16.00

“The 75% response rate and six
Sept. 28
months plus durability easily
Brentuximab
exceeds expectations”
Phase III trial
J.P. Morgan
data released

$15.00
$14.00
March 11
US PTO issues
patent for
Brentuximab

$13.00
$12.00
$11.00

“We believe SGEN is
July 23
an outstanding longBrentuximab
term investment
Phase I trial
opportunity”
Oppenheimer
data released

$10.00
$9.00
$8.00
$7.00
$6.00
Mar-09 Apr-09 Jun-09

Dec 7
Dec 11
“We see minimal impact to the value
Dacetuzumab Termination of
of SGEN...use any potential weakness as
Phase I trial
Genentech deal
a long-term buying opportunity”
data releasedJ.P. Morgan
for Dacetuzumab

Dec. 14
“We maintain that SGEN’s unique
Deal with
pipeline and technology depth will
Millenium is
[outperform the market]”
announced Blair & Company
William

Jul-09 Sep-09 Nov-09 Dec-09 Feb-10 Apr-10 May-10 Jul-10 Sep-10


36

AMLN t18m Share Price
$26.00

March 15
“We expect a Class 2 designation,
FDA sends complete
A 180 day review period, and a
response letter: REMS
Q4/10 approval…Target: $11”
Canaccord Adams
and labeling issues

$24.00

Sept. 10
Stock trend continues
to be dominated by
Byetta vs Victoza

$22.00
$20.00
$18.00
$16.00

“The Lantus scare will not
continue to help Amylin,
June 26
and Byettathat slip due to
Reports will
a lack of differentiation”
Sanofi’s Lantus

Jan 26
Novo Nordisk
launches Victoza
(Byetta competitor)

J.P. Morgan

causes cancer

$14.00

June 9
“Victoza has effectively been taking
No significant press
share from Byetta”
releases in nearly
J.P. Morgan
three months

$12.00
$10.00
$8.00
$6.00
Mar-09 Apr-09 Jun-09

October 30
October 30
label not Takeda
Byetta label “Updated Byetta Deal with likely
expansion
to impact sales,
approved as stand-alone but removes overhang”
announced, overshadowed
Morgan Stanley
med for Type II Diabetes
by Byetta label expansion

Jul-09 Sep-09 Nov-09 Dec-09 Feb-10 Apr-10 May-10 Jul-10 Sep-10


37

Why Your Big Deal is No Big Deal
§ Analysts still make noise
§ Broader market confidence matters
§ If it’s not your flagship product, no one cares (yet…)
§ Biotech stock prices still levered on binary events
§ Investors require smaller companies to “prove it”
§ You’re less attractive for M&A
§ Value is always realized through liquidity events


38

About Recap
Originally founded as Recombinant Capital, Inc. in 1988 by Mark Edwards and based in the
San Francisco Bay Area. In July 2008, Recombinant Capital, Inc. was purchased by a
subsidiary of Deloitte LLP and the business is now known as Deloitte Recap LLC. Recap IQ
Series by Deloitte is a trademark of Deloitte Recap LLC.As used in this document, "Recap"
means Deloitte Recap LLC and "Deloitte" means Deloitte LLP and its subsidiaries. Please
see www.deloitte.com/us/about for a detailed description of Deloitte LLP and its subsidiaries.

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