negotiating the deal

Lindsay Meyer ([email protected]) Deloitte Recap LLCOctober 7, 2010

Negotiating the Deal:Tactics for Execution

QB3 Global Bio-Entrepreneurship Course

mailto:[email protected]

1Copyright © 2010 Deloitte Recap LLC. All rights reserved.

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

The art of doing deals


Case #1 – SEATTLE GENETICS

Founded 1998 (Bothell, WA)

325 Employees $325M CashCancer & Autoimmune

THE ASSETBrentuximab Vedotin, an antibody-drug conjugate targeted to CD30

for Hodgkin and T-cell lymphomas


Why Partner?

Pros• Enables broader global development plan

• Supplements resources for:‒ Late-stage clinical trials

‒ Manufacturing

‒ Commercialization

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

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

• Non-dilutive financing alternative

• Likely to provide validation and reduces future cost of capital

• May increase brentuximab’s overall chance of success

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

• Termination of the collaboration can taint program

• Could reduce M&A possibilities

• Relinquishes some long-term value potential

• Might delay SGEN’s global commercial expansion


Partnering Process§ Initial Contact

35

20

10

5

§ Confidential Discussions

§ Due Diligence

§ Term Sheets


Deal Announcement


Deal Structure

Seattle GeneticsNovel, first-in-class therapeutic

Strong phase I data

Pivotal trial fully enrolled

Retains full US and Canadian commercial rights

MillenniumGlobal commercial

infrastructure

Flagship product Velcade

Strong oncology expertise

Obtains ROW 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


Partnering Timeline

2008

MayPartnering process begins

July1st contact with MLNM

JunePreliminary partnering meetings at ASCO

Nov – Dec Partnering discussions at Bio-Europe and ASH

2009

JanuaryPartnering discussions at JPMorgan

Jan - DecDue diligence

June 221st term sheet with MLNM

Nov 9First draft of definitive agreement with MLNM

Dec 16MLNM deal signed

April 6ADC deal with MLNM

May – June Partnering meetings at ASCO

Dec 4BOD approves MLNM deal

~18 months~5 months

~1 mo.

Different strokes for different folks


Case #2 - AMYLIN

Founded 1987 (San Diego, CA)

1500 Employees $574M CashDiabetes & Obesity

THE ASSETA Basket of Obesity Drugs including: Pramlinitide/Metreleptin (Ph. II),

Davalintide (Ph. II), AC163954 (OPT), Pre-clinical compound from Takeda


Partnering ConsiderationsChallenge

• Roles and Responsibilities

Solution• Divide responsibilities according

to each party’s strengths

• Competition Against the Collaboration

• Decision Making Authority

• Changing Regulatory Environments

• Create an environment where mutual agreement is the norm

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

• 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

• Committees with separate decision making authority

• Division of “final say” authority

• Defined escalation process

• 80/20 cost sharing in the US

• Amylin shares additional costs for certain clinical safety studies

• Required nomination of certain additional analogs

• Process to propose additional activities, free pursuit if rejected


Deal Announcement


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

Loan for CV safety study

Deal Structure

Amylin3 Phase 2 compounds for obesity

Option to license additional compounds

Co-promotion option of 1st 2 products

TakedaGlobal commercial

infrastructure

Strong diabetes sales expertise

Flagship product Actos

Obtains WW commercial rights

Now it’s your turn


Valuing a DealDiscounted Cash Flow Comparables Analysis


• Timing

• Structure

• Strategy

• Valuation

• Process

• Targets

• Sales Deck

• Contacts

• Meetings

• Follow-ups

• Term Sheets

• Competing Bids

• Optimization

• Key Provisions

• Contracts

• Diligence

• Committees

• Managers

• Optimization

When should we partner?

How should we structure?

Who should we target?

How do we maximize value?

How do we avoid pitfalls?

How do we optimize?

• Gap Analysis

• R&D Diligence

• Market Analysis

• Legal Diligence

• Target Pools

• Structure Options

• Valuation

• Tax Impact

• Position with partner’s deal negotiator

• Manage expectations

• Generate leads

• Process/Timeline

• Term Sheets

• Due Diligence Process/Timeline

• Key Contract Provisions

• Alliance Management

• Deal Optimization and Revision

Transaction Execution

Week 1-2 Week 3 Week 4-6 Week 6-18 Week 24 Week 25


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

Things you might be interested in knowing


Partners of Biotech Programs

Source: Deloitte Recap LLC

0

10

20

30

40

50

60

70

Num

ber o

f Dea

ls

Pharma Company Licensing and M&A Activity(2009)

Corp In-Lic

Univ In-Lic

Out-Lic

M&A


0

100

200

300

400

500

600

700

800Number of Deals by Stage at Signing and Field

(2005 – 2010)Disc/Lead

Preclinical

Phase I

Phase II

Phase III+

Therapeutic Focus


Early Stage Payment Trends Over Time

1990

Upfront $0.1

R&D $0.9

Milestones $0.2

Royalty 5%

Total Size $0.2

Licensing data from Recap IQ by Deloitte2010 data through September; no royalty figures available

2005

$2

$7

$33

35%

$33

2010

$9

$9

$124

$138

2000

$1

$5

$7

8%

$9

1995

$1

$7

$5

6%

$6

Going to the drawing board


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

Product License • License / Sublicense• Royalty• License Maintenance

Manufacturing & Supply • Manufacturing & Supply Rights• Reimbursement• Escape / Liability

Alliance Management • Implementation & Management

Equity Investment • Equity Investment Types & Pricing

Commercialization Contracts


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


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


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 […].

Must Have Examples: Amylin


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


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)


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.


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


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


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”).

Icing Example: Amylin


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


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

A final word on value creation


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

SGEN t18m Share Price

March 11US PTO issues patent for Brentuximab

“We believe SGEN isan outstanding long-

term investmentopportunity”

Oppenheimer

“We see minimal impact to the valueof SGEN...use any potential weakness as

a long-term buying opportunity”J.P. Morgan

“We maintain that SGEN’s uniquepipeline and technology depth will

[outperform the market]”William Blair & Company

“The 75% response rate and sixmonths plus durability easily

exceeds expectations”J.P. Morgan

July 23Brentuximab Phase I trial data released

Dec 7DacetuzumabPhase I trial data released

Dec 11Termination of Genentech deal for Dacetuzumab

Dec. 14Deal with Millenium is announced

Sept. 28Brentuximab Phase III trial data released


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

“Victoza has effectively been takingshare from Byetta”

J.P. Morgan

“Updated Byetta label not likelyto impact sales, but removes overhang”

Morgan Stanley

“We expect a Class 2 designation,A 180 day review period, and aQ4/10 approval…Target: $11”

Canaccord Adams

AMLN t18m Share Price

Jan 26Novo Nordisk launches Victoza(Byetta competitor)

March 15FDA sends complete response letter: REMS and labeling issues

October 30Deal with Takeda announced, overshadowed by Byetta label expansion

June 26Reports that Sanofi’s Lantuscauses cancer

“The Lantus scare will notcontinue to help Amylin,

and Byetta will slip due to a lack of differentiation”

J.P. Morgan

June 9No significant press releases in nearly three months

October 30Byetta label expansion approved as stand-alone med for Type II Diabetes

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


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

About Recap

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Copyright © 2010 Deloitte Recap LLC. All rights reserved.

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