January 13, 2020

MotionHall Executive Call Series: "I'm a China Skeptic"​ - Two Perspectives on Partnering with Pharma in China

"I'm a China Skeptic"​ - Two Perspectives on Partnering with Pharma in China

Transcribed notes lightly edited. Executive Call Series: I'm a China Skeptic - Two Perspectives on Partnering with Pharma in China. All Levels. September 24, 2019, 8:00 - 8:30 AM PST

Introduction:

Erin: Good morning everyone. I’d like to welcome everyone to our Executive Call Series today entitled “I’m a China Skeptic - Partnering with Pharma in China.” We’ve had a significant amount of interest in today’s topic with a large number of interested CEO’s, CBO’s and Business Development (BD) executives on the call joining us - it’s obviously a very important and relevant topic for many of you.

We did receive a number of questions prior to today’s call - thank you to all of you who took the time to send us those great questions in advance - we’ll address as many as we can today during our discussion. This morning we’re fortunate to have two fantastic resources on our panel:

Panelist Introduction: Paul Brennan, Principal at Pacific BioPartners

Erin: First, we have Paul Brennan. Paul is the Principal at Pacific BioPartners. For those of you on our most recent webinar, you'll be familiar with Paul's deep experience and impressive background. He's a very experienced senior deal maker with an extensive deal sheet, including M&A corporate restructuring in-licensing out-licensing, regional deals, and litigation resolution. He brings more than 25 years of experience in building and leading pharmaceutical and biotech companies internationally, and has a strong record in regulatory affairs, market development, and partnering. On the pharma side. He's held executive positions in a number of large pharmas.

Mr. Brennan played a significant role in the sale of Aspreva to Vifor Pharma for $915 Million, and the sale of Anormed to Genzyme for $580 Million and the merger of Tekmira and OnCore Biopharma. Most recently, he was responsible for an exclusive license agreement for Japan and other APAC regions between Astellas and Aquinox Pharmaceuticals. Mr. Brennan has also served in Senior BD and Regulatory Affairs roles with a number of large pharma companies in Canada and Europe. Welcome back Paul, and thanks in advance for your time and insights today.

Paul: Thanks Erin, happy to be here and really looking forward to this discussion. Good morning everyone.

Panelist Introduction: Sam Murphy, VP and Head of International Business Development at Salubris Pharmaceuticals and Chief Business Officer for its US subsidiary, Salubris Bio

Erin: Okay, and moving to our next guest, we’ve got Sam Murphy. Sam is currently VP and Head of International Business Development for Salubris Pharmaceuticals and Chief Business Officer for its US subsidiary SalubrisBio. His role encompasses origination, evaluation, and execution of licensing transactions, strategic investments and acquisitions outside of China, and leading global development of internally generated novel complex biologic programs. Prior to Salubris, Sam worked for ten years in commercial strategy consulting and transaction advisory services across several global firms, most recently IMS/IQVIA. Sam’s transaction advisory work included licensing and acquisitions collectively exceeding $2B USD in value. Sam completed his BA in Biochemistry, PhD in Molecular Biology and Post-Doc in Gene Therapy and Translational Medicine at the University of Pennsylvania, and he was a recipient of a Presidential Management Fellowship. Sam is currently a Board Member at GO Therapeutics, Viracta Therapeutics, and MedAlliance S.A., and a board observer at Mercator Medsystems. Are you there Sam?

Sam: I’m here Erin.

Erin: Fantastic - thanks so much for joining us.

Sam: I’m doing great! Thanks for inviting me to participate today.

Erin: From that bio, it sounds like you’ve been pretty busy for the past couple of decades.

Sam: A bit.

Erin: We’re grateful for your time and experience, and for sharing your thoughts, expertise and insights with us today on what has certainly already proven to be a topic of significant interest to our audience.

Sam: Yes, absolutely, my pleasure.

Discussion:

Erin: Great. Paul, I’m going to start with you. The format and idea for this webinar actually started with a discussion between you and I - you had suggested having two viewpoints - a bit of a debate format on the hot topic of partnering in China. We had a great chat about how you’re a bit of a skeptic, and more cautious or apprehensive about the idea of partnering in China. And thus, the idea of this webinar was born. After the invitations were sent out, I had a number of executives send in questions like, “What does he mean by “China skeptic?” and “Does he mean he’s skeptical of the quality of the project?”, and “Is he skeptical because it’s risky to partner in China?” etc. How would you respond to those questions? Can you provide some clarity around your position?

Paul: Right. The first thing I want to say is, although I’m an experienced dealmaker, I’ve never done a deal in China. However, what I have done is worked with companies that have gone through that strategic exercise to determine whether or not it was worthwhile pursuing a deal in China. And often, they decided it wasn’t really worth it. The decision to do a deal in China was really about the risk and benefit. Why would you want to do a deal in China? I mean, obviously the benefit will be hopefully financial reward coming your way and potentially other benefits. The risks are the time that you’re taking away from your core business, loss of control of your product because you have a partner out there doing work on your product that you can’t fully control, safety risks, the risks related to doing a trial and different population than your home market. And then intellectual property risks, which is really something that I don’t know a lot about, and would be really interested in hearing Sam’s opinion on.

When you take a look at potential benefits, and if you look at the paper that we’ve written at MotionHall around deal sizes in China[1], you see that there aren’t really a large number of deals in China where the total value is over $200 Million, and very few deals where the up-fronts are over $20 Million. So generally, I think, the average deal size over the last 10 years has been $10 Million and the median deal size has been $5 Million. With all the distraction that’s occurring, is it worthwhile to do a deal in China to only get $5-10 Million up front?

"The average deal size over the last 10 years has been $10 Million, and the median deal size has been $5 Million. With all the distraction that’s occurring, is it worthwhile to do a deal in China?" - Paul Brennan

Erin: Thanks so much Paul for providing some color to your “skeptical” position. Let’s check in with Sam and see what his thoughts are. Sam?

Sam: Sure, I think Paul makes some valid points. And there certainly has been a rapid evolution in China over the last few years. Even three years ago, when I started working with Salubris, as Paul mentioned, you can basically count on two hands the number of deals that were meaningful financially between companies outside of China and companies in China. Now, you can see, easily, four or five deals a month with meaningful financials and I would push back a little bit that $5 or $10 Million upfront in non-dilutive capital is not meaningful. I think, especially for early-stage, clinical companies, that amount of money can be important.

I think Paul is absolutely correct that there are some risks associated with giving up control. And that's why it is really important when you're looking for a partner in China to make sure that you find a quality partner that you can entrust with your products that you can align with on clinical development strategy, and regulatory strategy to make sure that you're not in any way putting at risk your global development program. But in addition to the financials, which I think we can all agree have increased substantially over the last couple of years, and whether or not they're meaningful at this point, I guess, is open for debate and depends on the company's perspective and understanding.

Discussion Sub-Topic: Epidemiological Advantages of Working in China

But the thing that Paul didn't mention that I think is also really important is the ability to generate data that are relevant to the Global Development Program, specifically in China. And I can give you one example of a company that we partnered with for oncology therapeutics, they're based in San Diego, they focused on virally associated malignancies. And their lead program is in EBV (Epstein-Barr Virus) and associated malignancies. The exact size of the market in the US is not clear. But what is clear is that in China, in Southern China specifically where we are headquartered, that is the epicentre of the universe for virally associated malignancies stemming from EBV infections. And so the prevalence there is 10 or 20 times higher than it is here. So we have access to patients and patient populations to generate data that they simply don't have in the US and wouldn't have without a partner in China working together with them, bringing the molecule forward there. I think that's another important consideration. It's an example but it's certainly not unique. And I think that's another big advantage in addition to the financials that are worth thinking about with China.

Erin: Okay, interesting. So some potential epidemiological advantages that need to be considered as opportunities for companies looking to partner in China.

Sam: Right, I think that is a good point. Another example, for a period of time, there was a flood of interest in partnerships in oncology in China, because China was seen to have all these, this large PD-1 and PD-L1 naive populations which was becoming increasingly difficult to find in the Western world for clinical trials. On the one hand, in that case, it could be an advantage. Or if that's the patient population you're pursuing, on the other hand, the lack of approved therapies in China to mirror the standard of care regimens in the US and Europe and Western markets can be problematic, and it creates significant differences in the patient population that you're targeting. That's an additional layer of complexity on top of the potential for differences in patient-reported outcomes as, as you suggested. So I do think it's something that companies need to be aware of, I think it's important when they go to speak with companies in China, they understand the differences in treatment paradigm there versus the markets where they're more familiar and understand how their molecule might be developed there.

Discussion Sub-Topic: Patent Protection and Intellectual Property (IP) Rights in China

Paul: One of the things I don’t have a lot of experience is in IP in China - can you tell me about your experience in China, and whether or not IP is respected.

Erin: We did have several questions from executives around IP concerns and patents, so it’s obviously top-of-mind as a potential risk.

“China does respect quality IP, and just like any other territory in the world, is not going to respect non-quality IP. That’s one important point.“ - Sam Murphy

Sam: I’ll echo something that our CEO says when he's asked about IP concerns in China, one of the larger companies in China is Tencent and they have an internal team of 200, full-time IP attorneys, and obviously a company in China wouldn't commit resources of that magnitude to IP if China didn't produce, protect and respect IP. There's, there's a bit of a self-fulfilling prophecy historically because companies outside of China didn't believe that IP was worth pursuing in China. The market wasn't mature, it was mostly a branded generics market. So for innovative products, it wasn't necessarily a good use of resources, understandably, to think about China patent strategy. And so what you end up within many cases was very poorly drafted patents from junior attorneys that Chinese companies could break pretty easily. And then that reinforced the perception outside of China that China doesn't respect IP. It's not the case. China does respect quality IP, just like any other territory in the world, is not going to respect non-quality IP.

And I think that's one important point. I think companies, now, because they see China is emerging as an important branded, innovative product market are paying much more attention to China with respect to patents, but even now, I think it's important for companies outside of China to understand that China has some unique rules with respect to IP. And it's important for your IP attorneys to coordinate with their counsel in China to make sure that those rules are being adhered to.

Paul: That’s a really good insight into IP. In addition to IP, there’s scientific know-how, which is really something that’s completely different from patents. Can you provide some insights around this?

Erin: We’ve also received a question around know-how and data rooms, specifically as it relates to risk and which data room vendors provide good security for sharing information such as intellectual property. Would you suggest sharing IP information prior to term sheet?

Sam: Sure, I think my response to that is that there are risks to disclosing know-how to any partner anywhere. And I think that this is really the important point with Erin's question, is that you need to be careful with your IP, regardless of who you're dealing with. It's not binary, in the sense that you need to be careful with China, but everybody else is a perfect actor outside of China. There are some bad actors in China, there are plenty of good upstanding companies in China, there are some bad actors outside of China, and there's plenty of good upstanding companies outside of China. I think really, companies should be careful with their IP and their know-how, with any potential partner.

Erin: Sam, how do you explain, if there are any, the differences in outreach approach, partnership arrangements and deal structure in China vs. a typical partnership in the US?

Sam: Yeah, I would say that, in China, it is pretty important, and when I say this, it's not necessarily in my best interest as head of international BD for Salubris, but I really think it's important to have a financial advisor working with you, unless you have somebody on your team who knows the China market who can speak the language fluently, who can engage with the companies in China, it's incredibly helpful, I think, for the companies outside of China, looking for a partner to have that advisor. And there are certainly a number of them that do a great job. It's just it's very hard to navigate and to know who you're dealing with, without having somebody who knows the landscape very well.

We have a number of partnerships now that are established cross-border partnerships. And one of the companies actually hired an advisory team for the tech transfer and joint steering committee meetings, and they participate as an external advisor on their behalf. They've been working in China for 20 years, but have US roots and, and go back and forth between the two countries. And that's been really helpful for both sides, honestly, because, they're more comfortable with the communications and making sure that they're getting a solid understanding and reinforcement of what we're telling them about the market. And, for us, it's just easier to work with a team that has a perspective and knowledge base within China.

I think the other thing, I'll say, and again, this isn't necessarily in my best interest, but I try to be neutral when speaking on a panel, is that there are a lot of companies in China looking for products, and you can scan the press releases and find the companies that may have already done deals with a minimum of $5 Million or $10 Million upfront. But there are probably a dozen more that you've never heard of that would be just as willing to make those types of upfront payments for the right product. And I'm not sure even if all of the advisors can get to all of the companies, but they're certainly in a better position than any individual who's operating outside of China.

Discussion Sub-Topic: For biotechs looking to out-license, can focusing on a Chinese partnership be a damaging company distraction?

Paul: Tell me a bit more about the distractions and potential bandwidth constraints of doing a deal in China vs doing a deal in EU or another Western country, what are your thoughts or insights around those types of considerations?

Sam: I think it's not a territory where you're going to do the deal and forget about it. I wouldn't say that it's necessarily more work than the West, but I do think there's work to be done there. That's part of the trade-off in taking the financial upside, and the upside of generating clinical data. I think for most companies, it would be in their interest to evaluate the capabilities of the team they're partnering with the more capable and qualified the team, the more likely you are to get as much benefit out of those discussions, as you are to get bandwidth constraints. And again, it's not going to be any more or less work, I don't think, than a Japanese partnership or a European partnership, but it is a significant amount of work.

I think that's why, if you look at the roster of companies that have done China partnerships, for the most part, they're not mid-cap biotechs. Obviously, large pharma, even though some of them are incredibly under-penetrated in China, won't partner with local organizations, or at least to this point, haven't partnered with local organizations. It tends to be the smaller, earlier-stage companies where the financials and that data is more meaningful, and this is true despite of the fact that it's also more of a bandwidth consideration on their part. They're willing to undertake it because of the upside.

Erin: Sam, can you speak to potential corporate culture differences and possibly some strategies to deploy when considering a potential partnership in China?

Sam: Sure, you will find in China, a variety of different corporate cultures among the biotech and pharmaceutical companies that are operating there because you have legacy generics companies that have a very generic company mindset, low risk tolerance and an older style of marketing in China, that, you know, is in complete contrast to the brand new companies that just formed a couple of years ago and were inundated with cash from funds, and are acquiring assets and have development teams with decades of global experience, but no commercial experience in China. I think you have, then, companies in-between, like Salubris, where we have our largest product is clopidogrel, which is generic and has been for some time. And then we (Salubris) have some moderately innovative products also on the market in China. And then here in the US, we have what we think will be the first complex biologic to go into the clinic in a cardiovascular indication globally. And so we think of ourselves on a spectrum from highly innovative to very risk-averse generic manufacturing. And you'll find companies at all different stages of that spectrum, or operating across that spectrum in China. I think it's really important to figure out which type of company is the best fit for you when you're looking to partner in China. Is it important to you that the company has the commercial infrastructure, regulatory experience and reimbursement experience? It's a very complicated system in China, nationally, regionally. And putting your product in the hands of a company that's never gone through that before can be risky, especially if you're later stage. If you're at an earlier stage, maybe you don't care as much. I think it goes hand in hand with a really important strategic decision that has to be made when partnering in China about where's the real value to our company? Is it is in the upfront right now that we absolutely need this cash today? Is it in the milestones? Do you really believe in the product's potential longer-term and the royalty stream is most important? I think those are decisions that need to be made almost in advance because it dictates what type of company or companies you would want to engage in China.

There's so much interest in partnering in China that it can be overwhelming. I've heard this from a number of people who started the China process and then ended up with, in one case, 30 companies in their data room and another case 15 term sheets when they collected term sheets. And you know, going back to Paul's comments about bandwidth, just running the process to get a partnership in China can be a significant bandwidth, consideration and constraint.

Discussion Sub-Topic: Effective Regional Outreach Strategies

Erin: What about some strategies for potential outreach? We’ve had lots of companies ask us how they should begin to approach, or plan to find potential partners in China, beyond their usual network and Rolodex? What do you suggest on that front?

Sam: Well, we talked about the use of a financial advisor. That's one way to do it. There are also now conferences that are in China that you can use. I mean, similar to the partnering conferences that are in the US and Europe. I won't comment on specific conferences, but I will say do your homework, talk to people who've gone to those conferences, see what their experiences were because what I've heard is that some are much more productive than others.

Paul: I’d also suggest utilizing the MotionHall OutMatch predictive partnering platform - it provides significant insights and predictive analytics for potential partners - and can be utilized for those considering a global deal, or a regional APAC deal. I’ve used their tools several times with a number of organizations looking to partner their assets.

Discussion Sub-Topic: Concluding Discussion

Erin: Thanks Paul. We’ve definitely got some of our members on the line today that have utilized the MotionHall OutMatch platform to help them find potential partners in China. So keeping an eye on the time here, I need to ask you Paul,given the insightful discussion we’ve had here today, are you still skeptical about partnering in China?

Paul: I’m still a bit of a skeptic, but maybe slightly less so. I’m still concerned about potential risks of partnering, but as opposed to 2-3 years ago when it might not have been worthwhile reaching out, it’s definitely now more so the case where you might have an opportunity where the rewards outweigh the risks. I wouldn’t count completely on a China deal being possible, but I’m definitely more optimistic and would definitely explore in the future.

“I’m still a skeptic, but maybe slightly less so. I wouldn’t count completely on a China deal being possible, but I’m definitely more optimistic and would explore in the future.” - Paul Brennan

Sam: I'm glad that Paul is moving in the right direction! I think the one thing that we didn't talk about is potentially compromising a global partnership. And I would say China is the easiest market to carve out without in any way contaminating a potential global partnership or acquisition because it's so challenging and unique even for the large pharma companies.

Paul: I agree with you on that front.

Erin: Okay, that brings us to the end of our very informative and interesting 30 minutes. I’d like to take this opportunity to thank both of our panelists - Sam Murphy and Paul Brennan - for their time, their insights and their expertise. I’d also like to thank those of you on the line for sharing some of your morning with us. I hope it was a valuable investment of your time. I’ve had a few questions come through asking for more information about MotionHall’s AI machine-learning partnering platform that helps companies predict their best potential partners and run a more competitive deal cycle, and I’ll follow up today’s webinar with some more information for anyone wishing to learn more about how these tools can support your partnering strategies and optimize your deal cycle, for potential China partnership considerations too. Thanks, all - and have a great rest of the day.

Sam: Thanks, Erin.

Paul: Thanks so much, Erin.

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