May 13, 2021

MotionHall Executive Call - Deal Dynamics: In-Licensing Rituxan

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

Guest introduction: Rod Ferguson, Managing Director at Panorama Capital

Rachael Craig, CEO at MotionHall: We've got a great conversation today. Great to see so many familiar faces on the call.

On one of our recent calls, I mentioned Rod Ferguson as one of my most important mentors, personally, as well as here at MotionHall. Much of his knowledge and expertise is built into our products and services. It's a real treat to have Rod on one of our MotionHall Executive Calls. He's an absolute wealth of knowledge, both from a company-building perspective, as well as transactions from every side of the table.

Dr. Rod Ferguson has an expansive career spanning over three decades. Rod has a wealth of experience in business development and life sciences investments. He's currently the Managing Director of Panorama Capital, a venture capital firm spun off from JP Morgan Partners in July 2006. Rod joined 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, a venture capital firm focused on life sciences as well.

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, Dr. Ferguson led the Rituxan in-licensing deal—which we’ll talk about today—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. Dr. Ferguson serves on the technology advisory board of The Economist, and a variety of advisory boards in the life sciences industry, including ours, to nonprofit boards. In addition, he serves on the board of directors of several private life sciences companies.

We're very lucky to have Rod with us today. Welcome!

Rod Ferguson: Morning, all!

Rachael: [Responding to audience.] Clearly, Rod has trouble holding a job. It's true, he's not a busy guy! [Laughter.]

Topic: In-Licensing Dynamics and the Rituxan deal

Rachael: We’re looking today at in-licensing dynamics and the Rituxan deal. Specifically, we're going to look at the later stages of deal dynamics. When you're getting closer to the transaction point or the closing stage of a transaction, what does that look like? What happens there? This tends to be the most psychologically-intense stage for executives, which is what makes it an interesting place to focus.

“[Late stage] tends to be the most psychologically-intense stage for executives”

- Rachael Craig, CEO at MotionHall

Rod, in terms of leading best practice in the buying or in-licensing cycle, late in the deal cycle, what's happening? What's it like to be in the deal leader’s mind as they're working towards a close? Specifically, what's happening in the deal leader’s mind when they know there are other alternative buyers for deals and they know it's competitive?

Rod: Thanks folks for taking the time. I appreciate it. It’s great to see some old faces here.

The Rituxan deal was done in the 1990’s. That's ancient history! Rituxan’s a massive multi-billion dollar cancer drug, so it’s still relevant, but this is old stuff. One of my observations would be that in our world of business development, with the exception of the new technologies that MotionHall brings to make our job better, there's still an analog component to this. Working with people is old-school and hasn't changed in all the years I've been doing it.

The hardest part of any deal, and everybody on this call must know this, the hardest part for the person driving the deal is the internal negotiation with your own management and board. The other side is a piece of cake compared to getting the deal across your own board of directors, your own CEO. Why? Because everybody thinks they are an expert in business development. It doesn't require a PhD and so you can imagine you're an expert. And everybody thinks they are! So that's the hardest part, internally.

With regards to the Rituxan deal, it was competitive, which makes it much more complicated to drive the deal as a buyer. There were three bidders all the way through that process, and Genentech was one. We didn't know it at the time, but Roche, who ultimately acquired Genentech, was the other one. Finally, a company called SmithKline Beecham, now GSK, was the third bidder.

Somehow Roche figured out that we were in this and Jürgen Drews, the head of research, pulled Roche out. Which was a big favor because we went from two competitors to one.

Ultimately, we won this because, as we found out later, IDEC Pharmaceuticals couldn’t make this product. IDEC, now Biogen, was a small biotech company whose finances were at something like two dollars per share. They were almost broke. A genius guy named Ron Levy of Stanford had founded it, but the company was in a world of hurt. They could not make this monoclonal antibody, period. So they had to find a partner who actually could manufacture it for them otherwise it was never going to be a product.

In the end, while it was a competitive process, the reason Genentech won was because at that time it was really the only capable commercial manufacturing company for biologics.

“The hardest part of any deal for the person driving the deal is the internal negotiation with your own management and board”

- Rod Ferguson, Managing Director at Panorama Capital

Rachael: Rod, you mentioned that you got Rituxan for a song, but there were competing bidders. You've also mentioned that there is some psychology in getting the price that you got on Rituxan and on holding frame. Can you tell us a bit about what it was like to feel the pressure of other bidders and how you came to the final price point?

Rod: When you know you’re in a competitive process as a buyer, it just changes the psychology. So to all of you folks who are sellers, the best thing that can ever happen to you is to get a competitive process because that changes your leverage point completely. We were in a competitive process, we knew it was real.

What's interesting though is, at the time we did this deal, there had never been a billion-dollar global cancer drug. Period. We were running off of marketing estimates; all these deals at late stages are driven by present value calculations from marketing numbers. Since there had never been a billion-dollar cancer drug industry in the world, the market estimates were modest.

The Genentech marketing folks, who were supportive, gave me a peak, best-case worldwide market estimate for Rituxan of $100 million. We're sitting with Kirk Raab , in the executive suite trying to get the deal across, and Kirk said that there's an upside in this deal and the marketing folks scrambled and came back with $125 million—amazing upside, best possible answer for Rituxan worldwide sales. If anybody knows Rituxan, they probably know that it sells around $7 billion a year today!

So because the net present value of the deal was driven by market projections, which it had to be, the numbers were tiny compared to all the deals you're seeing today. And since it was competitive, my boss Nick Simon (I give Nick a lot of credit here) he held the line on this and wouldn't let me bid higher. Which I wanted to do! It turns out, we did win.

Topic: Deal Terms for Rituxan

Rod: Genentech spent a total of $55 million on Rituxan;

  • $5 million in a cash-only signing fee
  • $50 million in IDEC equity-based milestones

The $50 million dollars of IDEC equity turned into over $2 billion on Genentech’s treasury books and allowed Genentech to manage its earnings for a decade-and-a-half hence. There was a profit-sharing deal with Genentech manufacturing so the other pieces of it were relatively straightforward. The profit sharing part was interesting, but it really let Genentech, frankly, launch what it became; a leading cancer company.

“So to all of you folks who are sellers, the best thing that can ever happen to you is to get a competitive process because that changes your leverage point completely”

- Rod Ferguson, Managing Director at Panorama Capital

The profits from that product changed Genentech’s trajectory. Art Levinson, who championed this deal and later became the CEO, took Genentech to where it went from there. So this deal was completely transformative for Genentech. Done, by the way, after the first version of the Roche acquisition, while we were still independent, which I also worked on. It really completely changed Genentech’s financial trajectory.

Topic: Advice to Buyers in a Competitive, Capital-Saturated Market

Rachael: Following on from that, what are the biggest challenges for companies in today's market? Maybe for someone who’s received a lot of funding? We have companies like this in the MotionHall membership right now, they're looking to make transformational buys. Things are competitive right now, and there's a lot of money in the market. So buyers are thinking “How do we stand out and move relative to other bidders?” How would you advise them?

Rod: I've been in this business a long time, and the amount of capital in this industry in the last five to seven years is just extraordinary. There's only so many great management teams and only so many great products and you have just completely excess capital right now. The greatest challenge for any person trying to acquire assets is that there’s a lot of mediocre teams, and a lot of mediocre products out there. How do you sort through it?

“You have to find some way to get to assets that are actually valuable. Figure that out, because it’s a hard thing to do”

- Rod Ferguson, Managing Director at Panorama Capital

You need some competitive advantage because there's 50 or more SPACs chasing these things. Capital is all over the place! So I will plug MotionHall because a competitive advantage is technology that will allow you to scour the planet, and I mean the whole planet, looking for assets that nobody else has found. Really, that's your single greatest competitive advantage. You can do it analog, through people you know, or go to science meetings. There’s lots of ways to scout this out.

Figure 1. Screenshot of MotionHall's InMatch In-Licensing Discovery Dashboard

Given there's so much excess capital and demand, you have to find some way to get to assets that are actually valuable. Figure that out, because it’s a hard thing to do. And once you find them, go acquire them. Find some angle against everybody else to beat them to the punch.

Often they’re in places way off the fairway. Not here in California or Boston or wherever. Someplace else. China may be a great source, Europe, or other places. You have to find where people aren't looking. We don't stumble over people walking down Sand Hill Road in California!

Use all the tools above because you want to be first, obviously, and make your offer before people show up.

Rachael: So speed, responsiveness, and comprehensiveness. These are things that we talk a lot about at MotionHall.

Topic: Understanding How You Differentiate as a Prospective Partner

Rachael: You mentioned that you didn't know that difference in manufacturing capacity at the time between Genentech and its competition during the Rituxan deal. But that was a huge differentiator for IDEC. Do you have thoughts on how much the deal value can change if you've got something differentiated that the seller wants? It's not all about capital upfront, it's usually also about the long-term success of the product and the business.

Rod: Yeah, I think at the basic level just having the seller like you and your team is a great thing. It's better to be liked than be disliked in this world. It doesn't necessarily go for that much, but it helps.

It certainly helps if you have some kind of strategic advantage or fit; so you're the buyer and you're in a market niche where your sales force dominates, or maybe you have a manufacturing expertise, or some other special secret sauce. Do you have some competitive advantage that will differentiate yourself from the other potential buyers out there? If you do, it’s a definite benefit. Because in many deals, probably in almost all deals, some non-economic terms are relevant.

“In almost all deals, some non-economic terms are relevant”

- Rod Ferguson, Managing Director at Panorama Capital

To the extent you as a buyer can demonstrate to the seller that you really have a legitimate, defensible, provable competitive advantage specific to the asset you're trying to acquire, in addition to being good folks to deal with, and good partners—which is important because there are a lot of crummy partners out there—those are absolutely non-economic factors that can help you win a deal or differentiate yourself from a deal that’s equal in economics to yours.

Rachael: We’ve got some questions from the audience. Let’s bring on Stephen.

Q&A: How important are internal deal champions?

Stephen, VP of Business Development: Thanks, Rod. I wasn't aware that Rituxan actually went for such a low price by today's standards. That is a song! My question is, did you have certain internal champions or stakeholders that assisted you or proved extremely helpful in positioning your company as being the bid winner? Sometimes you can't drive it yourself, you know that, and there's people that stand out in support of the deal.

Rod: Great question. Rachael's gonna smile because I preach deal champions ad-nauseam. If you, as a business development expert, have a deal champion on the buy-side who is really wanting to spend political capital to clear out all the approval hurdles you’ve got to go through, all the way up to your board of directors—you'll get your deal done. If you do not have that person with that throw-away, who's gonna expend political capital for you, you're probably going to get crushed in the process. That's it.

“If you, as a business development expert, have a deal champion on the buy-side who is really wanting to spend political capital to clear out all the approval hurdles you’ve got to go through, all the way up to your board of directors—you'll get your deal done.”

- Rod Ferguson, Managing Director at Panorama Capital

There were two deal champions for Rituxan. I actually think pretty much everyone on this call knows both of these people.

The first champion is a brilliant young scientist with a PhD out of Seattle. For a long time he sat on the board of both Google and Apple. He is currently Chairman of the Board of Apple. He's also the CEO of Genentech and now runs a little life science company called Calico. His name is Arthur D. Levinson.

Art had read a paper by a guy named Mark Stefan Kaminski in 1993 all about targeting CD20. It was work that actually the Coulter Corporation (which later became Beckman Coulter) had done. So Art was on this.

In fact, as this story goes, we went the first half with the Coulter antibody, which is radiolabeled. I took an army down there. I came to Art and I said, “This radiolabeled product is never gonna work commercially!” Art beat the crap out of me.

I had a brilliant young analyst by the name of David Ebersman, who was the CFO of Facebook later on, by the way. David, all of 25 years old, said, “I just talked to this guy Ron Levy at this lunch, and there's this other product at IDEC. It's not radiolabeled, same target, why don’t we look at that as well?” So we jumped on that.

So the deal pivoted from Art’s idea of the target, this crummy radiolabeled antibody that never really did become a product, to the non-radiolabeled wonder Rituxan, which was a huge winner.

The second deal champion was an extraordinarily bright young woman who had just come over from the Bristol Myers Squibb oncology team. She really was an underachiever in life; she was on her way to become the first woman Chancellor in the history of UCSF Medical School, and she just retired last year after five years running the Gates Foundation. Her name is Sue Desmond-Hellmann. So with Sue Desmond-Hellmann and Art Levinson (Art at that time was head of research, not yet CEO) on my side as deal champions, I had all of the firepower I needed to get this thing through.

Stephen: One follow-up; when deals like this happen, is it more luck or is there a visionary element to it?

Rod: I was interviewed for a piece in The Wall Street Journal at the beginning of the biotech boom. And one quote, which I stand by, is: “anyone who denies luck is a fool or a liar.” There is always luck in the world. There's always a random walk. You have to, as a deal person, be prepared for that. You just cannot control everything in life. You can look back and something either broke the right way or the wrong way for you, making a big difference.

Jürgen Drews figuring out on the Roche side that Genentech was the other bidder and pulling Roche out was a huge thing that I had nothing to do with. That was luck. Art Levinson pounding on this. Sue showing up at Genentech less than a year before we did this deal. We would have never done this deal if Sue hadn't been there! So there are a bunch of pieces of luck in there.

Actually, the CEO of IDEC at that time, Bill Rastetter, had been a business development person at Genentech before that. He knew and loved Genentech. He had been a young, star MIT professor before that. So he was very personally inclined to do this deal with Genentech. All of those elements were completely beyond my control. I didn’t have anything to do with it, and they all played positive aspects of this deal getting done. Q&A: Is it beneficial to in-license from companies with weak leadership teams?

Rachael: We've got a question from Patrick next.

Patrick, Chief Medical Officer: In my experience in the biotech world as a drug developer, what I am constantly amazed about is the amount of good products with poor management. It seems to me that the best opportunity on the buy-side is to find a product with poor management because your opportunities are a lot better than if you've got high-quality management. Is that a big factor in your searching process?

Rod: Patrick, thanks. Your question is an interesting one. You are right about weak management, there are actually a lot of companies with a great product and weak management. But weak management can break both ways for you.

On the one hand, weak managers probably don't know what they're doing. You might be able to kind of pull things off in the deal that you might not pull off with savvy management.

On the other hand, the problem with weak management or weak people in general is sometimes their ignorance gets in your way. They're not smart enough to do the right thing, the thing that's in their own interest. The challenge in getting a deal done with weak management, and weak boards of directors in particular, is when the board of directors can't get out of their own way. Not everyone on a board is a Steve James who knows how to play the game. They may decide to come back with stupid things and your deal can be destroyed for bad reasons. This is the bad luck part of it, where people who aren't capable show up and put all kinds of things in there and ultimately impede the deal to the point where it doesn't go through. I've absolutely seen that happen. So both sides of the coin, Patrick. Q&A: How do you negotiate against internally generated models that you disagree with?

Rachael: Alright, so let's hear from Paul and then we'll close out this first part of the conversation.

Paul, Senior Business Development Consultant: Hi Rod, good to see you! It's been a long time!

My experience is mostly on the selling side and not the buying side. One of the experiences that I've certainly had many times is you're working with an internal champion at the buyer, you're working with the BD group but you really don't know for certain who you're negotiating with. You may be negotiating with the marketing guy, you may be negotiating with the CFO, you may be negotiating with the head of R&D. You just don't know.

Oftentimes, things come back to you where somebody has run a model, somewhere in the company. I won't name names, but one big pharma company that we were working to do a deal with, we’d get these models back and we’d just scratch our heads going, “Where the hell did this come from?” How do you recommend managing that? I haven't worked with MotionHall, but I will say that data helps manage that, in terms of being able to push back on some of those things.

Rod: That's a great question, folks. We have a very experienced business development guy here, who you ought to listen to. By the way, he might be open to some board seats, so you can consider him for that as well, because he's got a lot of experience.

Paul: I did not ask for that plug, but I'll take it! [laughs]

Rod: So how do you manage it? There's lots of ways. I call it “massaging the steak,” or “massaging the beast.” The analogy is that you've got this huge beast, big pharma, and you're trying to massage it to feel where everything is.

Paul is asking a great question, here, because it’s hard.

What I did was ingratiate myself personally to my counterpart at the other organization. Your counterpart, the business development person (normally a Director-level person, as you're rarely in front of the head global person), that's your best partner. I would try to ingratiate myself to my counterpart to get to know them as a human being and try to be their best friend. Because the best way that you're going to find out what's really going on on the other side is if you have a spy who's willing to tell you.

The reality is that a business development person sitting at the table has a career also, and getting a big deal enhances their career. So you're all about, “Hey, let me help you. I'm gonna make you a superstar, but you’ve got to give me some information so I can get this done and make you a superstar.”

“The reality is that a business development person sitting at the table has a career also, and getting a big deal enhances their career.”

- Rod Ferguson, Managing Director at Panorama Capital

I was always trying to be their best buddy, sitting on their side of the table, and helping them out. Usually business development people are pretty friendly, gregarious folks and that's why they're in those jobs.

If you ingratiate yourself, you would be amazed by what your business development counterparts will tell you; “I’ve got this idiot in marketing who's blocking this thing... I have a clinical person who is blocking me... My regulatory person is a pain in the butt…”

Your counterparts are fighting the hardest battle. They're battling every one of those approve-a-trons inside their organization to get their deals done and they're frustrated as hell. So if you're on the other side you say, “Let me look at it and help you win. Give me some information and we'll make this go. You tell me and we'll answer all the questions miraculously, and will make this all work.” So that was always my personal way.

The other way you can go, is you can get your guru science person on your side to call their guru science person and talk scientist-to-scientist. Either find the right scientist in their research department, or on the board of directors, or their SAP.

To conclude, find as many different ways as you can to have entry points into the big player that you trust to get information, and use them all. You would like to have an unfair competitive advantage to the seller. You would like to know more than they know about even their own organization. And that's how you massage the beast. That’s the challenge. You just have to keep going for that information to overcome all the obstacles and help your colleague on the other side of the table win.

“You just have to keep going for that information to overcome all the obstacles and help your colleague on the other side of the table win.”

- Rod Ferguson, Managing Director at Panorama Capital

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