Rachael Craig, CEO at MotionHall: Good morning, everyone! Thank you for joining us today in the latest in MotionHall’s Executive Series of webinars. This is the third in a series of discussions addressing impacts of the coronavirus on our industry. If you're interested in learning more about previous discussions, you can find the transcripts for these on our blog and LinkedIn pages.
Executive Call Series: Biotech Company Strategy in 2020 with Chris Garabedian
Executive Call Series: Leading Deal Conversations over Video with Anton Gueth
I want to start by talking about the effects the pandemic is having on venture capital and private financings, which we're all concerned about. I think the data on venture has been somewhat confusing up to today. Some people are reading the signals and say, “Well, it looks like venture funding is up.” I think there's some immediate reasons for why that might appear to be the case, and we’re going to also want to be mindful of second order effects that may play out over time.
What I believe is that some of the effects we're seeing thus far that make it look like venture deals are up have to do with deals that either: a) Were in motion prior to the pandemic setting in; or b) Are coming from non-traditional life sciences investors interested in healthcare as a result of COVID-19. We have seen interest from non-traditional life sciences investors wanting to invest in treatments for the novel coronavirus, so there's some uptick here. But on the whole if you talk to VCs and if you ask people what's happening behind the scenes on deals, and I believe what the data is going to show, and in line with the 2008 crash, that venture is overall retracting. That data is going to become a lot more apparent in the coming quarters as we can capture that and see that overall deal volume and values are down. That venture investors are worried about the market and the upstream effects for them in terms of LP management and how they're managing their funds. Of course, they're still going to have to deploy their capital. But typically, what we see in situations like this is that venture is retracting and deal values are down. I think that's not too surprising for anyone to hear.
If we can accept that venture is likely retracting, that it's going to be harder to close a venture deal, and that the demands from the venture investors are going to be higher from you as a company builder, and valuations that will be lower, the second order effect when that happens in the market is that people begin to turn to licensing as an alternative. If you can't get the venture investment that you want, all of a sudden licensing earlier becomes a more attractive option.
Here at MotionHall, we're seeing many companies beginning to think about this now. But a lot of companies are still hoping that the venture market will be the same. Looking at it from that direction, where some are moving faster and saying, “Look, venture is down right now. It's going to stay down for a little while; I'm going to move to licensing.” What we expect at MotionHall, and I think a lot of us in the industry expect more broadly, is that with that switch to licensing, licensing becomes a lot more competitive. If more companies want to license and are looking for the attention of buy-side dealmakers then that makes the entire market more noisy. There's more competition in terms of attention to manage when you're running your business development cycle. Going further into the future from here, when you've got a competitive licensing market that doesn't favor sellers, which is what we're headed into, then, not all companies are going to be successful. Again, we'll talk a little bit later about what you can do to be successful under these conditions. But typically, when this happens, and you see a more competitive licensing market, some companies will also not be able to get the licensing deals that they're looking for.
"There’s a lot that we can do to take control of this future and get ahead."
For companies that can get neither their preferred venture or licensing deal, what we can expect to happen next is that companies will turn to China for regional licensing deals. Chinese deal values tend to be lower, but often will license earlier in the pipeline. That's a possible deal to get. And if you are going to give up regional rights and still hope for a global partner, Global Ex-China is generally a good way to go. However, we don't know how China will react to that influx of deal flow when it happens. This is unprecedented. But we do expect the sell-side people looking to license will turn to China. Of course, for the group that's not successful with a Chinese regional deal, and if that company is in an unfortunate situation of running out of money, which some will be, that's when we see the pricing hit the bottom on M&A and cheap buys occurring. So, not great news in terms of where we're headed; but I think that there's a lot that we can do to take control of this future and get ahead if we can be clear-eyed and realistic.
I think this piece sounds lighter relative to what we just discussed; but it's also really important. In this future that we're looking at right now, there's less travel, there's more video. There are pros and cons to that, that we've discussed in previous executive calls. It's been surprising to hear from dealmakers who are closing over video just how helpful they found it to meet without jet lag. I think that might sound small, but if you've been at the negotiation table and it's 2:00 AM for your brain, it can be a really nice thing to get back to your own time zone for future conversations.
Obviously executives are more accessible right now, they're not in commutes, and they're not on long flights and you don't have to compete for their time at conferences. Coming with that is connecting on your own timeline. At MotionHall, we always recommend that you connect on your own timeline. There's a lot of power in choosing when you want to meet somebody and who you want to meet, as opposed to waiting for conferences or networks to do that for you. In this case, you absolutely have to do that. The digital conferences just don't do that work in the same way that the in-person conferences do. We consider that a pro and hopefully you do, too. I think the big cons that come in here then is that we're not going to get the information that you might be able to gather networking or in-person settings. I know for my meetings, for my attendance of BIO, and many of yours, no small part of what you're doing when you're bumping around at a conference and meeting people with a company is getting a better understanding of how they operate, trying to capture details that may not be in public information about how they're thinking about deals like yours and just learning how to trust and understand people at a higher level. That's not going to come back in the digital settings. So it leaves us with some pressure to find other ways to learn and streamline connections.
We've also seen at this point that across the board: venture, licensing and M&A, getting to consensus among decision makers is harder. Part of that's because everyone on those teams also has had to adjust to working via video. We've heard it said several times that traditionally somebody would be able to physically round people up, bring them into a boardroom and bang on the table. That's just not possible over video. So be aware that can make getting to consensus harder.
The last piece, I think this did come up in the questions for this webinar. How will diligence be managed in a digital setting? The question is a great one because we don't really have good solutions for this yet. You're not going to be able to do an on-site for diligence, and if we want to go check out a manufacturing facility, you're not going to be able to do that in-person. It's not clear what the solutions for that will be. What we've seen so far at MotionHall is an expansion of legal language and agreements to account for the inability to do that on site diligence. That means that there's a larger legal bill, there's a larger legal conversation and people trying to find language that they can put into their contracts that helps compensate for the lack of ability to do the level of in-person diligence we’re used to.
A little bit more in terms of lessons from 2008. I think it's worth putting the caveat in - nobody can predict the future, of course. If we could, we'd all do better. However, if we look at the 2008 crash, one of the things that we see very clearly in the biopharma industry is that there was a net retraction in technology and platform deals. We can expect that this time around there will be a retraction from doing those types of deals as well, there will be fewer of them and it will be harder to get them done, and instead there will be a focus on much more traditional therapeutics licensing.
We may also see and I think we did see this in 2008, Abbvie was a major winner in this regard, companies that want to grow, either among the larger pharma set or a medium/specialty player, wait until the prices on the market start to hit bottom and then have the capital and strong leadership team to go on a buying spree to really support growth. We may see a player that we don't think of as often set themselves up to grow over the next 18 to 24 months as this plays out and they take advantage of that.
Finally, VCs and your board are probably already talking about this with you, you're probably talking about it with your team internally. There's a pressure to focus when capital to finance our business is uncertain. When it looks like the market is retracting in various ways. It makes sense to focus our resources on a lead asset or a select number of assets that we think will do the best in this situation. The way that you want to think about that typically is a scientific viability as well as attractiveness in the business development setting from licensing or M&A, rather than trying to maintain a robust set of programs that are unlikely to transact for the next little while.
Rolling into what you can do, the first piece is just to be realistic. The classic mistake here is to say, “Well, our company will be different. VC funding is not going to be harder for us, or for this reason we're going to get through, licensing it's not going to be harder for us. We're going to be a step ahead. We can expect business to run as usual.” I think the realistic take is that all of these things are going to be harder and more complicated. Even if VC doesn't retract in the way that I've just suggested, it's quite clear that it's going to be more complicated to navigate in the best case situation. You want to be really clear eyed, as an executive and as a leadership team. But that's the reality that we're moving into and that reality is going to extend for an 18 - 24 month period of time. You have to be really clear eyed about that.
"You want to be really clear eyed, as an executive and as a leadership team."
I think it's also important to be very clear eyed about the fact that some pharmas will retract as well. Some have already done it. It may have to do with the adjustments to video, it could have to do with other adjustments that they're making inside their company. Being clear eyed about this gives you the opportunity to get ahead of other biotechs.
Now, we can start talking about the good news and how you win in this type of situation. If you know that these things are likely to come to pass, you can start to make decisions ahead of your peers and other companies that might be competing for dealmaker attention with you. This gives you more opportunity to plan your strategy and move faster on that. If we think that VC is high risk in terms of being able to get the deal that we want. Can we start to plan for licensing today? Can we start to plan for licensing ahead of the wave that comes in Q4 or later, trying to do that.
"Make zero compromises in approach planning."
We always suggest at MotionHall that you make zero compromises in approach planning. We can talk more about that in other calls or various settings. In this case, I think that the need to make zero compromises is even higher. That means that you want to be extremely comprehensive and understand all the potential parties who can transact with you. Missing even one of those partners means that's missing leverage for you to get deal competition or if that one that you missed is the one that was going to transact, it's really something you don't want to do in this market environment. You want to be extremely clear on how you position. You want to be extremely mindful of how you're navigating these companies, appreciating that there will be a retraction, there'll be an increase in volume of outreach. The burden is on you as a person representing your company in a licensing, VC or M&A transaction is much higher to make it easy for them to understand you and make it clear why you're a valuable deal for them.
I’ll give you a little sense of how we think this will roll out at MotionHall and in our networks. I think Q2/Q3 this is where we're going to learn and see the data that really represents the VC retraction that's happening. Fewer deals and valuations down. It's worth noting that Q4 in a normal year is the busiest quarter of the year and has been for more than the last five years in terms of transactions, particularly licensing transactions are usually closing. By volume, December is the biggest month of the year right ahead of JP Morgan. I think we're going to see even more of that this year as companies who clamped finance, as financing is hard, are turning to licensing. Expecting that to really hit in Q4. I also think that in Q4, we're going to see a lot more apparent retraction from the pharmas that are going to retract and do fewer deals. Of course, we're going to be experiencing that nobody on that buy-side is going to be well equipped to deal with the volume and the switch to video in terms of being able to adjust all of that activity. Harder, more competitive, prices down, we will touch a little bit more on what you can do about that.
As we roll into 2021, I think that's when we really see a wave start to turn to China as an alternative to eventual M&A. This is what I think we're going to see from companies that are struggling to pull the ends together. Hopefully, you're not one of these companies in late 2021 considering M&A at a bargain price as a last effort. Inevitably, as much as one can ask people to get ahead of these waves as much as I might want them to, some people won't -the majority of people won't. That's hopefully where this conversation helps you think about how you get step ahead at your company instead of following this pattern.
We always want to know where our products and assets fit in the market of potential buyers. I just want to give you a sense of the MotionHall product. Where we're typically encouraging our members or where our members are getting ahead right now. Looking at the future, what do we do if we expect that venture retraction creating an uptick in licensing, but those deals are more competitive and there's more noise for buyers and understanding us? As I mentioned, the first thing we want to do is understand the total set of potential buyers. This is something that we're always doing for our members in our Outmatch Workspaces. In this example here, we can see 79 total matches that have been picked out of the global set of potential partners. These obviously have to be strategically suitable, viable matches. You absolutely don't want to miss any of these potential partners.
"In an average year, 60% of total licensing deal volume goes to medium and speciality players."
If I were looking at a licensing deal for a company, and I was looking at it for your company, the first thing I would want to know is how many potential buyers are there? What's the quality of fit with those potential buyers, appreciating that it's going to be harder for the next little while and not everyone's going to behave in the same way that they used to. The next thing that I would want to know is who my worst fit matches are? So companies that are likely to have a viable deal conversation with but that are not as important to me to transact with as my best matches. Worth noting here that in an average year, 60% of total licensing deal volume goes to medium and specialty players. Rather than the top companies, quite a lot of the total deal volume goes to lesser known medium and specialty players. I absolutely don't expect that trend to change in the current market environment. I think it's even more important that you consider those medium and specialty players. Often the trade off is that they can't afford quite as much upfront, but they may really value your asset and you may be able to strike a better deal on royalties. It’s always worth considering. We're going to want to, especially in this environment, start our conversations with those lower risk companies to talk to that helps us iterate on our pitch and understand what's resonating with the market for our deal and also start to calibrate how much harder those conversations are going to be as the mindset of buyers in this pandemic environment continues to shift and impact deals. Ideally, we always want to do this in a normal deal cycle. I think best practices become so much more important for you and your company in a challenging market environment like this. You don't only want to use these companies to iterate on the pitch; you really want to use them to start to drive interest in your deal. Ideally, create some competitive pressure.
"Best practices become so much more important for you and your company in a challenging market environment like this."
The best way to get a deal done with the company that you really want to transact with is to have an alternative option. Through this long tail of companies here (Figure 1), not only are you dealing with lower risks, but you're also dealing with companies that are hungrier for a deal. They're going to be more likely to engage with you. Small and medium sized companies also have less complex decision making structures. There's fewer stakeholders, so they can be easier to navigate in that way, too. Ideally, you're generating a term sheet as you do this and continuing to move and communicate momentum to potential buyers of your deal. If you do that, then as we move up the set and you're able to communicate momentum and interest to more powerful buyers, maybe the buyers that you want the most. That tends to create a really good forcing function, it tends to communicate value, it helps you generate interest. It's really important for creating competitive dynamics in your deal where the buyer doesn't just feel that they can wait until later. One of the things we're doing as we move up this way, is trying to let the buyer know that we value ourselves, we're running a process, and that there's a possibility, a very real possibility that we're engineering, that the deal won't be available later. If they wait for prices in the market to hit the bottom, if they want to wait for you to have more data, again, by running this type of formalized process, you can start to create a forcing function that lets them know that you may not be there if they wait. That's going to be important as the buyers understand that this is really their market and they're also overwhelmed by volume.
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"Your best practice in any market environment, no matter who you are, what you have, should be to really understand how your asset fits within the context of that potential buyer company."
Now not only do you want to run that approach that I just talked about, you want to note that tailoring is always extremely important. Your best practice in any market environment, no matter who you are, what you have, should be to really understand how your asset fits within the context of that potential buyer company. You want to understand where you fit in their pipeline. You want to understand how your deal compares to deals that they've done historically. We’ve got some of this information here at our tools that MotionHall (Figure 2).
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We're able to very easily look at what types of deals Novartis has done in the past. How many deals do they do year over year? We should understand how many deals they've done like ours and be able to speak to that when we're talking to business development executives at Novartis or any other company that we're considering transacting with. While we're here on deal volume, I also think it's interesting to point out that going into this really tough set of macroeconomic circumstances, it will be harder. We might expect that a company like Novartis does fewer deals in 2020 and 2021 than they would typically do. But that history of doing deals is still going to be predictive of doing a certain amount. So what do I mean by that? A company that's done more deals in the past is likely to still net more deals than a company that's done fewer prior to this environment. If we're seeing 10 deals YoY here in terms of licensing deals at Novartis, maybe in the next year, we'll see eight or six. It's hard to know, maybe we'll still see 10. But on average, companies that have been doing a good number of deals are going to continue to do a relatively higher number of deals than companies who've done fewer. That's good to keep in mind.
Back to tailoring, understanding where we fit relative to the company that we want to transact with. Where do we fit in their pipeline? Where do we fit in the portfolio of marketed products? It's never been more important for you to communicate that clearly to a potential buyer and make sure that you're very transparent about where your value connects to their strategic priorities and how all those pieces come together. That's how you're going to stand out. It's how you're going to cut through the noise. It's how you're going to navigate that company successfully rather than being yet another company that's confusing for them to understand and contextualize that falls off their radar. This is how you increase your chances of conversion through the deal cycle.
"Once you've heard no from a pharma, it's really hard to turn that around."
You want to think about how you enter these organizations. I think most of the folks on this call today know that once you've heard no from a pharma, it's really hard to turn that around. I do believe there are many ways that you can always do that. We see that all the time at MotionHall. But, it is harder and it takes more work. It’s better to, as they say, measure twice and cut once, to really plan your approach and talk to the right person from the get go, even more so in the current environments. Appreciating that with the switch to video, we're not going to have that information that comes from in-person gatherings, we’re not going to have the information that we gather at conferences. That also stretches the gap for you and for them in terms of being able to contextualize and provide a lot of streamlined context in a very small period of time in the windows that you have to talk to these people.
"There's no loss in having more knowledge here to help you navigate. That's all upside."
So, email tailoring, presentation tailoring, approach tailoring, choosing the right person. I would say choose the right person on the BD team and understand the people around them. There's no loss in having more knowledge here to help you navigate. That's all upside. You also want to understand the scientific team. Again, if I were transacting in this environment, I would think very carefully about approaching pharma without understanding how my science really fits within the context of their science (Figure 3).
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"Understand if it's possible to connect with a scientific champion."
I would put a huge emphasis on understanding if it's possible to connect with a scientific champion. Even more important, the earlier we are in the funnel, so pre-clinical/Phase I, is the most important place to do this. Also if you are going to go ahead and try to license a technology or a platform deal, this is the place to put a lot of resources because this is how you're going to find your success. If you had a pharma who said no to you in the past, this is a place to put resources if you want to turn that around. As you get towards Phase III, and certainly a marketed product, this is important, but less so. You can focus a bit more on business development and talk more about that marketed portfolio of drugs. What we're showing you here, as drawn from PubMed, patents and clinical trials, to help you understand very specifically, where the science being done at a potential buyer company matches up with your science, how that connects, and then you can dig into those articles to figure out who the scientific champions are that you might want to talk to. People who can appreciate your science speak to its value and help explain that to the business development person. Appreciating that with the volume of science that any individual person sees, and the volume that they're going to see in the coming quarters, they really need you to connect the dots for them so they can understand and appreciate what you’re sharing. Unfortunately, if you don't do that, they're just not going to have the bandwidth in almost every case to do that themselves. It's so much better if you take the power into your own hands.
Alright, we're at time. Thank you for joining us today, your questions and contributions to the pre-survey. And you're of course welcome to talk to our team about any of these concepts that we discussed today.
We always value your feedback in terms of what's interesting to you and what will be helpful.
Have a beautiful morning!
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