By Pamela L. Esposito, CBO of Replimune, as part of the From The Trenches feature of LifeSciVC.
“You gotta know when to hold ‘em, know when to fold ‘em, know when to walk away, know when to run…” Kenny Rogers’ The Gambler, a song now enshrined in the Library of Congress’ National Recording Registry, is what I consider the soundtrack of business development. It has played over and over in my mind since his death earlier this year, inspiring contemplation about the right approach in negotiations. As it relates to business development deals in the biotech sector, one may think I am talking about upfronts, milestones, royalties, and extracting fair value. But so much of what makes a good or bad deal, in hindsight, lies beyond the headline financial terms. Experience has taught me that small things matter. I may be labeled persnickety or stubborn in a negotiation, but if you are willing to go into “the weeds” on deal terms, walking away can be the right decision if your concerns are not addressed. Conversely, successful partnerships, promote the business success of both parties down to the finest detail of an agreement.
One of the first deals I led was for a small RNAi-focused company in Cambridge, MA that coincidently was pioneering the use of RNAi for potential pandemic viral outbreaks. We were negotiating with a nasal delivery company that could help us administer our products via inhalation. Most aspects of the deal were strong and important for the advancement of our approach. But in the days of mad RNAi intellectual property “land grabbing,” it was impossible to predict what know-how would become proprietary knowledge and be considered a trade secret. I advocated walking away from the deal based on what I believed to be a far too low trade secret royalty: “Only 2%? The deal’s off!” I was brought back from what I thought was the point of no return by a few more experienced mentors and even my counterpart on the deal, who understood that a trade secret royalty was actually icing on a cake. It was a small term, with similarly small impact. But this is not always the case.
My counterpart on that deal became a long-standing industry friend on the buy side. Over one JP Morgan lunch, she told me I needed to accept a universal truth: “There is no such thing as a bad deal if you are the seller.” I think she meant to convey, don’t blow a good financial deal over small terms. This might be her buyer’s mindset, but the game has different rules on my side of the table where even if the dollars involved are attractive and can fund the company for many years, the non-financial terms are what can really come back to bite you. How does one know or delineate what those terms might be? Are they the same in every deal? While I have learned to concede on many non-financial terms and can generally find mutual workarounds for most issues, there are still a few that I can’t reconcile. The one universal metric I use when considering seemingly small terms is does the proposed term allow us to maximally leverage data. Or put another way, will it “dis-enable” us from further raising money, either via equity or additional business development. If the answer is yes, then the deal is a no. A deal must enable or improve a future financing and not be an obstacle to a further strategic deal. Period, full stop.
I return to the idea (and at the negotiating table to the position) that those seemingly small deal terms are not synonymous with irrelevant points and therefore can’t be predicted to be inconsequential. Often, the one that falls into the “small term, deal-breaking potential” category for me is the use of data in a collaboration. There are a few others that have vexed me, but this is a blog post, and well, I have another Zoom meeting to attend soon.
In nearly every first draft of a collaboration or supply agreement, I have found restrictions on the use of data generated in the collaboration. It usually starts with some broad term stipulating that data cannot be shared with any party outside of the collaborators, ever. As my Depression-era grandmother used to say, “Would Macy’s tell Gimbels?” During negotiations, usually with big pharma, concessions often allow data sharing after a period of time has elapsed or after publication. Sometimes concessions will limit or restrict, even by name, what counterparties can or cannot see the data. All of these “concessions” allow the industry partner the luxury of time to plot its next move in relation to an asset, all while making it impossible for the counterparty to create competitive tension. The proposed time restriction is often anywhere from months to years. This may seem like a short time period to a company with a 100-year history and a solid financial footing, but nine months is interminably long for a small company fighting for its life on a quarterly, if not daily, basis. To put this in context, most companies I’ve worked at update their data presentations with a near-weekly frequency. Further along in clinical development, timelines get longer, but it’s fair to say most biotechs live essentially “hand to mouth,” or on an experiment-by-experiment basis and the ability to share data with potential partners and investors, often through presentations, can buy the next meal.
For small biotechs, value is driven in a singular way: generation of data. Data is their currency. Why should a biotech accept a term that prevents it from leveraging or using the data it generates, to its max, so it can live to fight another day? Restricting data sharing ties a biotech company’s hands. If data cannot be used to create optionality, you might as well not even have spent the time and energy generating it. The small biotech won’t be able to create competitive interest and at that point really only has one buyer/partner for the asset or company. Not having options is not a good place to be. In its most extreme, this term could also be seen as essentially running the biotech partner out of business. Seemingly a small term but with outsized impact– any and all data needs to be shareable at the discretion of the biotech.
Experience births perspective. While my buy-side friend isn’t entirely wrong, not looking out for key nuances can have truly devastating results for smaller biotechs. And while this is not meant to be a dire warning, I advise: Do what makes sense but be willing to walk away to protect the data generated. Always remember that the bold decision can be the hardest one to make but may offer you the best card in the long game, “an ace that you can keep.” Good ol’ Kenny Rogers certainly was on to something.
Thanks to Philip Astley-Sparke, Arleen Goldenberg, Jason Rhodes, Katherine Coleman and Stephanie Kohn for reading drafts of this post (I really am a natural collaborator…).