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Business Development for theBiotechnology and PharmaceuticalIndustry

For Clare

Business Developmentfor the Biotechnologyand PharmaceuticalIndustryMARTIN AUSTIN

Martin Austin 2008All rights reserved. No part of this publication may be reproduced, stored in a retrieval systemor transmitted in any form or by any means, electronic, mechanical, photocopying, recording orotherwise without the prior permission of the publisher.Published byGower Publishing LimitedGower HouseCroft RoadAldershotHampshire GU11 3HREnglandAshgate Publishing CompanySuite 420101 Cherry StreetBurlington, VT 05401-4405USAMartin Austin has asserted his moral right under the Copyright, Designs and Patents Act, 1988,to be identified as the author of this work.British Library Cataloguing in Publication DataAustin, MartinBusiness development for the biotechnology andpharmaceutical industry1. Biotechnology industries 2. Pharmaceutical industryI. Title615.1'0684ISBN-13: 9780566087813Library of Congress Cataloging-in-Publication DataAustin, Martin.Business development for the biotechnology and pharmaceutical industry / by Martin Austin.p. cm.Includes bibliographical references and index.ISBN 978-0-566-08781-31. Biotechnology industries. 2. Pharmaceutical industry. I. Title.HD9999.B442A97 2008615.1068'4--dc222007051369Printed and bound in Great Britain by TJ International Ltd, Padstow, Cornwall.

ContentsList of FiguresForewordChapter 1Chapter 2Chapter 3ixxiThe Role of Business Development1Defining business development1Knowledge6Analytical skills8Communication12Project management14Process improvement15Planning the Portfolio17Portfolio management17Evaluating the company’s products18Responding to changes in the market21Balancing the portfolio23Identifying the Needs29Portfolio objectives33Quantifying SWOT34Locating gaps38Gap analysis39Functional advantages41Segmentation43Portfolio constraints44Internal landscape47External landscape54Intellectual property58

B U S I N E SS D E V E LO P M E N T F O R T H E B I OT E C H N O LO G Y A N DP H A R M A C E U T I C A L I N D U S T RYChapter 4Chapter 5Chapter 6Chapter 7Profiling and Searching for Opportunities65Search database67Search targets69Web-based research70Contact management72Conferences76Competitive intelligence79Confidentiality81Initial due diligence84Modelling and Valuation89Valuation89Approaches to modelling91Complex models93New product issues96Measures of value98Different value perspectives99New ventures99Steady state101Buying or selling101Enterprise value102Strategic value103Redemption value104Structure105Structuring the Value111Deal structures113Other deal structures130Due Diligence and Negotiations135Due diligance135Negotiations141vi

CONTENTSChapter 8Chapter 9Sealing the Deal: The Contract155Contract structure156Dra ing the contract162Making the Transaction Work165The nature of the alliance165Making the alliance work167Alliance management170Dealing with problems in alliances172GlossaryIndex181185vii

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List of FiguresFigure 0.1The structure of the bookxiiFigure 1.1Unseen market competitors4Figure 1.2SUI forecast9Figure 1.3Term sheet10Figure 2.1Quadrant chart19Figure 2.2Product cohorts by vintage20Figure 2.3Patent expiry21Figure 2.4Discovery success22Figure 2.5Mergers and acquisitions24Figure 2.6A61k patent oppositions25Figure 3.1Objectives, strategy and tactics30Figure 3.2Traditional SWOT35Figure 3.3Numerical SWOT components36Figure 3.4Numerical SWOT chart37Figure 3.5Numerical SWOT interpretation37Figure 3.6Growth circles40Figure 3.7CNS organization chart43Figure 3.8Market segmentation by product function: a gap analysis44Figure 3.9Opportunity a ributes47Figure 4.1Search plan by segment67Figure 4.2Search strategy, by segment, by product, by company70Figure 4.3Opportunity anatomy: emergency contraception71Figure 4.4Mind mapping80Figure 4.5Genetic reduction of market opportunity86Figure 4.6Evaluation array87Figure 5.1A ‘cocked hat’90

B U S I N E SS D E V E LO P M E N T F O R T H E B I OT E C H N O LO G Y A N DP H A R M A C E U T I C A L I N D U S T RYFigure 5.2GPS triangulation91Figure 5.3Market share penetration92Figure 5.4Probability of failure107Figure 6.1Distribution of licences112Figure 6.2Valuation of an asset for sale113Figure 6.3Take-out versus earn-out value124Figure 6.4Special purpose vehicle133Figure 7.1Negotiation mind map142Figure 7.2Term sheet issues148Figure 7.3Do’s in negotiations153Figure 7.4Don’ts in negotiations153Figure 8.1A licensing ‘program’156Figure 9.1Alliance types166Figure 9.2Alliance structures167Figure 9.3Joint steering commi ee170Figure 9.4The terminal cascade173x

ForewordThis book has come about through the creation of a course in pharmaceuticalbusiness development. In 2004 I met with Luc de Lange who was establishingCELforPharma – a new management training firm where he is the CEO. Lucwas seeking new courses for the new company. He had identified that nospecific courses were being offered for the industry in the area of businessdevelopment and asked if I could develop such a course for him. The resultis a 2-day course which covers largely the same content as this book andhas evolved since the initial versions to be a high-level overview of businessdevelopment with special emphasis on the needs of the pharmaceutical andbiotechnology industry. In developing that course I received a great deal ofhelp from Luc in refining the structure and delivery of the messages. Over thelast 3 years we have focused on the issues that the delegates have identified asthe most interesting and relevant to them, and these are reflected in this book.Therefore, rather than a empt to explain every nuance of the techniques andtools required to develop businesses in the industry, I have tried to providethe same kind of ‘illustrated tour’ of the structure of a licensing transactionwith an occasional detour into mergers and acquisitions or financing. Thecourse now also runs twice a year in China in association with David Xue ofPharmaguys Ltd, Beijing. I have since developed an expanded 4-day version ofthe course which is presented with a faculty of colleagues from the industry asthe ‘European Course on BioBusiness Development’ (ECBD) and is run underthe auspices of the University of Basel as an elective module in the Mastersin Advanced Studies in Drug Development Sciences offered by the universityunder Professor Fritz Bühler.Business development in the pharmaceutical industry is a topic whichis too broad and diffuse to try and encapsulate comprehensively in a singlevolume and I cannot hope to provide a description for more than a fraction ofthe possible variations in deal structure and techniques used. So, drawing onthe continuing popularity of the pharma business development course, I offersome of the experiences I have had and stories I have heard which can act as a

B U S I N E SS D E V E LO P M E N T F O R T H E B I OT E C H N O LO G Y A N DP H A R M A C E U T I C A L I N D U S T RYbroad checklist for those trying to bring their own deals to a successful close.I’m sure I will have missed many items and issues but I hope the book will actas a reasonable guide to help colleagues plan their business development dealsand other transactions and avoid some of the worst pitfalls while en route.STRATEGICANALYSISPortfolio{DUEDILIGENCE Y& TACTICS{EvaluationTerm SheetNegotiationContractGOVERNANCEAllianceFigure 0.1The structure of the bookxii}}GAPANALYSISWHERE, HOW, WHO?}}FINANCE &STRUCTURESTRUCTURINGDUE DILIGENCE 2DISPUTE RESOLUTIONTERMINATION

The Role of BusinessDevelopmentCHAPTER1Defining business developmentWhat is ‘business development’? This is usually the first question I haveto answer whenever I’m asked what I do for a living by people outside thepharmaceutical industry. The answers I try to give are o en tailored to theaudience and what they are likely to quickly understand from their ownexperience. However, as few people have any idea that such a role existsbeyond some hazy idea of marketing they usually smile politely and suddenlyremember there is someone on the other side of the room to whom they mustsay hello immediately. So a definition of business development, at least as Ihave seen it performed since it comes in many different guises, will be useful. Idefine it as ‘any activity that alters the status quo of the business’. This includesactivities such as: planning adding for growth subtracting for profit business process improvement competitive awareness and advantage.Planning is a central activity to business development because, as a friendonce told me, ‘There is no worse combination than great tactics and a lousystrategy – you just make things worse faster.’ In order to plan well, the businessdeveloper will need to have or obtain a number of skills and resources andthese will be the subject of later chapters. However, a base set of skills for thebusiness developer include being well organized, having a good breadth ofknowledge, imagination, being good at analysis in different forms and havinggood communications skills, particularly listening and interpretation. Goodorganization means not just being able to collect information but to collate it,recall it and relate it. I have had the advantage of having worked briefly in IT

B U S I N E SS D E V E LO P M E N T F O R T H E B I OT E C H N O LO G Y A N DP H A R M A C E U T I C A L I N D U S T RYwith database designers and seen how the discipline of having a process foreach of these activities creates a systematic approach. These processes can bemade into a computer program. Addressing the information needs of planningin a systematic way brings organization to the planner and helps in structuringtheir communications to their own organization and to their counterparties inany negotiations.Imagination is required because, while the pharmaceutical industry isat the pinnacle of scientific and technical innovation, bringing this scienceto market needs creativity and application. Business developers must lookbeyond the technology and into the future. This requires forecasting: seeing thecombination of products or of processes or even of companies to create morevalue, which is needed to develop the business.Solid planning enables one to say ‘What if?’ about tomorrow. For instance,if our sales are 100 million today, what might happen next year if: a competitordoubles their promotion or brings a new product to market; perhaps a newsurgical technique enters the market; two competitors merge and become morepowerful or any number of other potential events? Many businesses have failed,or failed to thrive because they did not plan well, which means looking highand low and far and wide at their situation. It is business development that hasthis responsibility in both large and small companies. Companies that becomebound up in their own technology and so see only their nearest competitorsand local markets can limit not just their vision but their potential as well.Planning offers different choices; choices to add new products or companiesto their portfolio for growth, or, if the company is mature, to sometimes‘subtract for profit’ by dividing products and spinning off activities which arediverting resources or diluting profit or growth. You may ask, ‘Why do largecompanies sell off product lines which are profitable?’ The reason is that just asgardeners cut off healthy branches which are growing in the wrong directionor making more wood and leaves than fruit, the company must be ‘trimmed’ toproduce a be er result; particularly if the company is publicly traded. This mayinvolve divesting itself of a slow-growing older brand to concentrate on newfast-growing products. The result will allow the chairman to point to rapidgrowth and a reduced reliance on products under threat of generic or othercompetition; shedding lower profit divisions or business units will also focus acompany’s activities on what is the heart of its business.Close analysis of the company’s plans can also reveal deficiencies in businessprocesses. When seeking reasons as to why next year’s growth cannot be more2

T H E R O L E O F B U S I N E SS D E V E LO P M E N Tthan ‘x’ per cent, or why last year’s growth was only ‘y’ per cent, it may be thatthere is insufficient manufacturing capacity or that the supply chain cannotperform fast enough. It may also be that orders can’t be processed or shippedfast enough or that orders are not being generated at sufficient speed. In eachof these cases the business development function should be taking the lead inidentifying the problem and proposing solutions.With the skills to collate and organize the data required for analysis and theimagination to see why the company is where it is, and what could be done toimprove and increase the top and bo om lines, the business developer has animportant role in the strategy and direction of the company. There is a furthermajor role for business development: as the company’s champion, someonewho monitors competition. Business developers need to be very aware of threatand competition, sources of which include: internal constraints––inertiadistraction age and time direct competitors indirect competitors external constraints––external inertiadistraction new competitors task focusing.Competition comes in many forms. Perhaps the most galling is thenegative effect of internal competition; the inertia in an organization whichis best expressed by the old saying, ‘familiarity breeds contempt’. When partsof the organization se le for ‘the way we’ve always done it’, and ‘the easiestway’, then the company is not trying to improve its product. Many parts of anorganization can become guilty of this and manufacturing and administration,two of the non-‘frontline’ groups, are particularly prone to it. Administrativefunctions tend to encourage inertia: the tedium of the task of shi ing invoicesand processing orders divorces staff from the reality of the market and theolder a product is the less a ention it gets in the organization. Years ago, asa product manager for older products (a good training ground for business3

B U S I N E SS D E V E LO P M E N T F O R T H E B I OT E C H N O LO G Y A N DP H A R M A C E U T I C A L I N D U S T RYdevelopment), I frequently had to go and unblock the system where stacks oforders or dockets or whatever had been sidelined because of some other priorityor just through volume of work and ‘not enough resources’. This cry of notenough resources is a favourite among researchers and in manufacturing too.Manufacturing functions are o en diverted by minutiae since in any functionthere is a bewildering array of distracting events which are constantly present.Completion of each part of the project may be delayed because one thing oranother has to be fixed first. Of course, all of these problems would be solved ifonly they had ‘more resources’.I list these distractions and sublimations as competition because like frictionthey slow down the business and so require the a ention of the businessdeveloper every bit as much as does the competition that emanates from theoutside world.Idleness and distraction are also powerful competitive forces in theirown right because the variation in peoples’ underlying natures, before theyare grouped together as customers, divides them into categories affecting thebusiness development landscape (see Figure 1.1).In planning, the unseen market competitors are rarely featured as drivers ina market yet as barriers to entry they form sometimes insurmountable hurdles.Distraction, which is given negligible a ention when compared to directcompetition, occurs in the external market because people are overwhelmedwith information.A company’s business developer needs to be aware of direct and indirectcompetition as actors and factors in terms of the market as well as in specificproduct challenges. It may be that the market opportunity can be treatedby different modalities such as in the treatment of metabolic diseases liketype II diabetes. Modifying someone’s diet so that they lose weight can beIgnorantFigure 1.1UnconcernedUnseen market competitors4Misinformed

T H E R O L E O F B U S I N E SS D E V E LO P M E N Tan effective way of controlling their diabetic symptoms and, while weightreducing foods may not seem to be a major component of the market, newfunctional foods are being developed which are likely to increase in the useof one modality over another, not involving a pharmaceutical product andcould reduce the number of patients who should be considered as treatablein a market forecast. Similarly, cellular therapies that introduce new islet cellsto the pancreas through various means are in the clinic and could also soonimpact the direction of the market.In oncology the introduction and development of new products is quiteintense. The number of patients available for treatment will be linked only tothose entering therapy once those who have existing disease are treated. Manymarket models seen at investor conferences fail to take into account the factthat the available market for new biological therapies may be reduced becauseof advances in other areas such as radiotherapy or surgery.Even activities of the industry which are not intended as competition canhave competitive effects. When a product for thrombolytic therapy was beingevaluated it became apparent that the market was being severely depletedby the number of clinical trials being held for different agents, including theUS National Institute of Health (NIH), which was a empting to establishthe value of the therapeutic approach itself. Since there are only 1.5 millionacute myocardial infarctions (heart a acks) per annum in the USA then,a er discounting those whose heart a ack occurred too far away from majortreatment centres to be useful, the number of new patients who would benefitfrom such therapy was some 250,000 per annum. Seven trials, each of whichrecruited 10–15,000 patients, were therefore leaving few patients to be treatedon a paying basis.Business developers must therefore learn and apply their skillsappropriately.While they need to be aware of the situation of the company on the basis ofhistorical data, they must also be capable of projecting future scenarios for thecompany in a multifaceted and multivariate environment with independentlymoving elements and competitors who will react to any change made by thecompany. Plans made to change the company must be flexible.The skills base for business development has three distinct areas: knowledge,analysis and communication.5

B U S I N E SS D E V E LO P M E N T F O R T H E B I OT E C H N O LO G Y A N DP H A R M A C E U T I C A L I N D U S T RYKnowledgeIndustry-specific knowledge is required in six key areas: research manufacturing the supply chain development sales and marketing finance.RESEARCHKnowledge of the research process does not mean that the business developmentperson must be either a scientist or have performed this role. Some understandingof the biological basics of a drug’s action – and so the comparative strengthsand weaknesses this could bring to a marketed product – is crucial however forevaluating or valuing a product for sale or for licensing.MANUFACTURINGManufacturing constraints and processes are a major component of a product’svalue. Inherent complexity in a manufacturing process can become a protectionif the know-how specific to a process is kept confidential or if it is patented. Suchcomplexities might, however, be constraints and so a barrier to licensing theproduct. When considering a product, awareness of its ease of manufacturingis a vital component for the business developer.THE SUPPLY CHAINThe supply chain, especially logistics management, is another component whichaffects product value and again is o en overlooked. Yet physical barriers havereal effects on business. I was once le with no alternative but to fly 10 tonnes ofan active ingredient from

Business development for the biotechnology and pharmaceutical industry 1. Biotechnology industries 2. Pharmaceutical industry I. Title 615.1'0684 ISBN-13: 9780566087813 Library of Congress Cataloging-in-Publication Data Austin, Martin. Business development for the biotechnology and ph

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