May 13, 2021

MotionHall Executive Call - Deal Dynamics: Auctioning Herceptin

Transcripts have been lightly edited for clarity. This is part two of a three-part conversation with Rod Ferguson. Part one here.

Guest introduction: Rod Ferguson, Managing Director at Panorama Capital

Dr. Rod Ferguson is currently the Managing Director of Panorama Capital. He was previously at JP Morgan Partners as Managing Director in their life sciences venture practice in 2001. From 1999 to 2001, he was a partner at InterWest Venture Partners.

Prior to InterWest, Dr. Ferguson held a variety of management positions over an 11-year career at Genentech, most recently as Senior Director of Business and Corporate Development responsible for worldwide licensing transactions for both technology and pharmaceutical products. Notably, in his time with Genentech, he led the Rituxan in-licensing deal, and the auction for out-licensing Herceptin. Prior to joining Genentech in 1988, Dr. Ferguson was an associate with the law firm McCutchen, Doyle, Brown and Enersen.,

Dr. Ferguson received a BSc (Hons) in biochemistry from the University of Illinois, a PhD in biochemistry from SUNY Buffalo, and a Juris Doctor cum laude from Northwestern University. He serves on the technology advisory board of The Economist, and a variety of advisory boards in the life sciences industry as well as non-profits.

Topic: Determining When to Push to Close a Deal

Rachael Craig, CEO at MotionHall: We’re going to talk a bit about the sell side, out-licensing, and Herceptin.

Rod, one of the big questions for you is how should the deal leader know when it's time to push for a close? There's a lot of soft skills judgment in that but you're also really clear, there's a number of data points that you can reference to help keep your clarity of perspective.

Rod Ferguson, Managing Director at Panorama Capital: Sure. The Herceptin deal is not going to illustrate this, so let me just put that one aside. We’ll get to it. But in general this is the really hard one, and it's ultimately a judgment call. You have to know yourself as a person, who you are and your characteristics. How do you look at the world?

My personal character is that I'm kind of a chicken about bluffing. I'm chicken in the sense that I don't want to call the question until I'm really sure that I'm going to have a successful outcome. There are people braver and more successful than me that would call the question.

The downside, of course, is obvious. If you call the question thinking you've got an auction dynamic going, and you think you're going to be able to force bidders, but nobody shows up, well you have a completely busted process. That's a bad place to be. For me, that's so bad that I'd rather err on the side of not calling the question until I'm sure.

When are you sure? Simple; somebody gives you a term sheet. You want to find that weak management team out there, who you can use as a stalking horse to give you a term sheet. If you have a term sheet from some actual legitimate player, that's the best catalyst because then you can legitimately go back to everybody else and say, “I’ve got a term sheet, it's time to call!”

“When are you sure?
Simple; somebody gives you a term sheet”

- Rod Ferguson, Managing Director at Panorama Capital

Another aspect of being sure when to call the question is collecting information from data rooms. Compared to my days, which were like carving stone chisels into stone tablets, you now have these data rooms that track everybody who goes in and everything that is looked at. So you can go to your own data room and figure out from all the players you've been talking to how many people have gone in there, how much time they spent, and presumably the names of the people. The data room tells you a lot about what the other side is doing for work.

And of course there’s communicating with your business development counterpart. “Where are you guys? What number of committees have you gone through? Really tell me where you are in your process.” That, as I mentioned before, is massaging the beast. You get as many information points as you can and you aggregate all of those things together as a deal person. Then you just make your best guess about the timing. “Okay, let's call it!”

You can give a realistic deadline; a couple of weeks, something not too fast. Pharmas can't get a cup of coffee in less than two weeks so you have to give them something reasonable, which might seem to you like a million years. But three or four weeks should do. Set a deadline and then drive everything possible towards that deadline. If it works, and you get at least one more term sheet, which is the goal here, then you are in the driver's seat. You have a competitive dynamic, and then we'll get to what that looks like in the nirvana situation like Herceptin. But in general, that's what I say, Rachael, calling the question is a pure judgment call which I've gotten wrong and I've gotten right.

Rachael: A lot of soft skills are required and I think the soft skills piece is difficult.

Rod, one thing we here at MotionHall do with all of our companies is to get them to work with the tail of the market. We say, “These are the companies to get interested. They’ll give you feedback on your pitch. You’ll probably be able to move faster with them on a term sheet. Talk to them first and see if you can drive that competitive dynamic.” It's always easier to get there when you can say “You can't wait for more data, you can't wait on this any longer because we and other companies are moving on this deal.” Working that tail helps you make that true.

I think the other piece that's essential in what you just said, Rod, is by using modern tools you can measure the activity level in the data room. That's really concrete information that gives you a sense of the level of interest, who might be your deal champions, and how senior the players are. That's information that is now easy to assess, especially with LinkedIn and MotionHall’s tools. Using this to inform the way you're thinking about your level of confidence is key. I think that at the end of the day, the biggest one is almost a gut feel where you can tell somebody wants to move. And you've got to account for that.

Topic: Reasonable Timelines to Producing a Term Sheet

Rachael: Rod, how long should you expect a pharma to take to make their decision and produce a term sheet? Let's go for the average scenario first, where we're working to drive that deal competition, but it's not Herceptin.

Rod: Let me state my assumptions, because assumptions always matter.

Here I’m assuming you have a motivated partner who's done enough work inside their organization, they’ve gotten the approvals they need to submit the term sheet, and the business development person has some stature and clout.

In that scenario, you can get a term sheet from a big pharma in two or three weeks from when you call the question. If they're ready, that's the fastest realistic timeframe. It could be longer than that, but you can get one in two or three weeks if they're really ready.

Topic: Auctioning Herceptin

Rachel: Let's talk about Herceptin. How quickly can pharmas move when they feel sufficiently motivated?

Rod: All right, now I get to my nirvana. The Herceptin auction was 23-24 years ago. In the mid-90’s I'd gone out around the world with a genius scientist named Bob Cohen, on the back of a Phase II dataset that was frankly pretty small, probably 30-40 patients. I failed miserably. The best offer I got for the rights for Herceptin was a $10-million dollar present-value deal. We failed! Art Levinson looked at me when I came back and said, “We're not doing that.”

Two years later, on the back of Phase III data—which is still only a few hundred patients, but far more impressive—we went back to the world. The single thing that I wish I had then, and you guys all have the good fortune to have now, is MotionHall.

You're a business development person on the sell-side and you're trying to figure out who you go after. What you'd love to know is: who are the four or five companies out there that are by far the most likely to close a deal with me? As a business development person I don't care about anything else. I care about closing a deal. That's what MotionHall does for you. That's the secret sauce of this AI partnering system that Rachel and her team have put together. I didn't have that in the mid-90’s.

“What you'd love to know is: who are the four or five companies out there that are by far the most likely to close a deal with me? As a business development person I don't care about anything else”

- Rod Ferguson, Managing Director at Panorama Capital

What we did back in those analog days, me and a whole bunch of bright young people and a lot of resources, is we scoured the globe and we came up with a list of about probably 20 global pharma companies—all of which had a commercial oncology franchise of some sort. That could be as little as one little old toxic poison product, up to Bristol Myers Squibb and Amgen and J&J who were the big players at the time.

We wrote old-fashioned letters to business development. The data for Herceptin were good. And, interestingly enough, Roche, which at that time owned and controlled Genentech, passed on this product not just once but twice. We had letters from Roche insulting us, telling us that Genentech was so stupid, that we should have killed this product off years before and this was a mistake. Letters that said this to us, by the way, from our good friends back in Boston. So we sent all that information out and over the course of just the most fun process I’ve ever had as a deal person, we got 15 term sheets. Fifteen term sheets!

At one point, I had the CEOs of Amgen, J&J, Bristol Myers Squibb on private jets, and an armful of people in Genentech’s biggest conference room all asking, “What do we have to do to win this?”

“I had the CEOs of Amgen, J&J, Bristol Myers Squibb on private jets, and an armful of people in Genentech’s biggest conference room all asking me ‘What do we have to do to win this’?”

- Rod Ferguson, Managing Director at Panorama Capital

Art Levinson would kick me aside and say, “Rod, you're making me angry!”

And I’d say “Alright, Art, why am I making you angry when I’m doing my job?”

“Rod, these CEOs are telling me they are upset because you're driving up the price for them and they want to win this deal!”

I looked at Art and I said, “You know, my job is to keep doing that. I'm sorry if you have a problem with these folks, but that’s your problem not mine!”

We ran this auction for six or seven months.

Remember that this is 1997, and cancer drugs were just a baby, and this is one of the first billion-dollar oncology drugs ever. I had around $300 to $400 million in true present value, guaranteed payments, in my deals. I was going to launch a third auction round, which I just kind of invented myself. The auction was on, I had five players, I was ready to go until they slit each other's throats.

By the way, no investment bankers, no Goldman Sachs, we did all this internally. We did not need the bankers to do this for us. And no fees to anybody.

“No investment bankers, no Goldman Sachs, we did all this internally. We did not need the bankers to do this for us.”

- Rod Ferguson, Managing Director at Panorama Capital

However, after all that Art Levinson and I had a late night meeting. Art brought in Nick Simon and myself and said, “Roche is going to take this. The auction is off.”

Art continued, “I've been going by myself alone to see the folks in Basel. I've been keeping them informed all along the way. And notwithstanding the fact that they've told us we're idiots all along the way, the fact that they've seen every multinational pharma on the planet bid to this point on this asset, they've decided, maybe they're not the smartest people in the room. The auction is off, we are going to cap it. Rod, finish this deal right now and Roche is going to get in on those terms.”

There’s two footnotes to this story. The first is; Nick Simon was unhappy. This late meeting with Art was a very angry meeting as you might imagine. Nick Simon and I, particularly Nick I give him credit, debated hard with Art. But at the end of the day Art was the CEO of Genentech and it was his decision. We stormed out of there at about 10 o'clock at night.

Art walked down from his executive suite, came into my office, and as I sat there fuming he said, “Rod, you know, I understand your situation. I apologize to you, but it's my decision as CEO. You have to understand where I sit.”

I said, “Fine, Art. But you have to realize that I promised in blood to every counterpart pharmaceutical company that we were talking to that Roche was out. You have just ended my business development career because nobody is ever going to believe anything I ever say.”

I know the turnover is fast and people move, but your personal credibility in this industry, it matters. You want to have as high integrity and personal credibility as you can.

“Your personal credibility in this industry, it matters.”

- Rod Ferguson, Managing Director at Panorama Capital

I said, “Art, you just flushed me. I swore to folks that Roche was out and now you're telling me they're in.” I actually became a venture capitalist about a year later, because I really did take that view. Integrity is important to me. So I left Genentech and became a venture capitalist—another story.

The second footnote is this; in 2009, Roche took Genentech completely private. It’s been owned by Roche ever since. There’s a 400-page proxy statement for that M&A transaction. If you've ever read these M&As, they have to describe in unbelievable detail for the SEC every aspect of every deal that they have ever done. This proxy statement listed the Rituxan deal, the Herceptin deal. It listed every transaction Genentech has ever done with Roche and other partners.

One single deal in that document stood out as infinitely better for Genentech and its stockholders than any other sell-side deal Genentech had ever done, and that was Herceptin. That was because Roche had to pay true fair market value because we auctioned this thing, and we got to stick it to the folks in Basel. And so, it was a lot of fun!

In a competitive dynamic that gets to be that level of nirvana. Despite everything these pharma folks will tell you, I've seen they can get on a jet, they can move heaven and earth, they can do anything that they will tell you is impossible if you can get close to that level of competition.

So I wish all of you once in your careers an opportunity to do something like that, because you will enjoy it, I promise!

“I've seen [pharma CEOs] get on a jet, [and] move heaven and earth, they can do anything that they will tell you is impossible if you can get close to that level of competition.”

- Rod Ferguson, Managing Director at Panorama Capital

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