The credit crunch as an opportunity: A deal maker's paradise?




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Video title: The credit crunch as an opportunity: A deal maker's paradise?
Released on: May 19, 2009. © PharmaVentures Ltd
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  • Summary
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What are the deal making implications of the credit crunch? This discussion takes a look at the impact of market conditions on biotechs'/VCs'/large pharma's current business and future prospects, liquidity and availability of finance, the impact on pipelines, availability of suitable programmes for large and mid sized pharma and biotech and the impact on valuations on distressed and acquiring companies.
The changes in deal making.
Fintan Walton:
Welcome to the, our first panel discussion today at our exceptional meeting here at the British Consulate in Cambridge, Boston. On my panel I am very pleased to have three distinguish guests representing different parts of the industry. If I can start at the extreme right hand side - my left we've got Todd Maclaughlan who currently heads up Negotiations for Novartis Oncology, welcome Todd. Next to him I have Stephen Potter, who is Senior Vice President in Corporate and Business Development for Genzyme, welcome Stephen Potter.
Stephen Potter:
Thank you.
Fintan Walton:
And another distinguish guest Rob Wills from Johnson & Johnsonand he holds the position of Vice President Alliance Management at Johnson & Johnson. So, so welcome to the panel, three of you.
Rob Wills:
Thank you.
Fintan Walton:
Now we are here to talk about deal making during the financial crisis. So the very first question is I ask you Rob Wills, man who is out there doing deals and helping deals coming along has there been a change in the way deal making is taking place in the last 12 months, have we seen a significant change?
Rob Wills:
Well speaking from my perspective I don't think we've seen particularly significant change because of the financial situation, because the fundamental business parameter still holds we need products. All big pharma needs them you are not going to get them through your own research, so it is critical that you form partnerships, have has there been a change in the supply of good opportunities it seems that it was a down year, yeah opportunities continue to be there do I - I don't think that what we were seeing if you have for example if it was a late stage product that was something that was interest to big pharma you can still have I would bet in auctions going on like you have in the past. So I mean I think it's just was more what was available into a wide range.
Fintan Walton:
So Johnson & Johnson hasn't changed it still wants good products at this particular stages in clinical trial but a problem is with the supplier the biotech companies?
Rob Wills:
Yes now I will add on to that specifically for us and like some other pharma " big pharma might have a similar issue, the bigger pressure on funding needs is not the dollars that you or the credit it's you impact on the team now, because we are allowed to invest so much in the R&D as a percentage of the sales and we have to we have obviously income targets, top-line growth targets so that has put more lot more pressure on doing deals from a big pharma perspective at least from where we were setting is the P&L.
Fintan Walton:
Right. So from Johnson & Johnson's perspective then do you have to change the way you do deals if there is not that many opportunities out there?
Rob Wills:
Well absolutely I think, but - the supply and demand is a problem that's going to make it very difficult for everybody, but it you know I think the better answer to the question might be that yes we are like everybody else we are looking at different structures, different alternative financing models, option models things that might allow us to do things may be not as ideally as we would and if you could just go into do the stream license or acquisition and you would do something at one stage that you could you know function around your P&L pressure.
Fintan Walton:
Okay. So I could pass on to Stephen Potter and then you are obviously playing an important role in Genzyme which is a slightly different based to Johnson & Johnsonbut one obviously is out there looking for opportunities of a particular breed that took their type, what's your view?
Stephen Potter:
Also I actually want to go back on your chart where you've talked about the nature of the deal flow and it really look like in 2004, 2005 things start to tale up you know I found an interest statistic and I am not sure how accurate it is, but about 20-years ago there where 700 companies and they created 20 MC's, now we have 5000 companies and they've created 20 MC's so somewhat reinforce with the same, we may not have a " there is a funding problem but remaining also just have fundamentally a quality problem. And I think if we step back and look at has our business model changed all, I think the answer is probably no, we've got certain criteria that we look at and they fall in the category of " is this the real change in the standard of care that's been, are there things that we can do in this relationship that would actually make a difference to the product you know is it synergies with our capabilities, do we - can we sell it and there is something's that we can sell particularly well and some things we can't and if we can't we are probably not a very good partner. So I think you know our model is the same and we look at the 4, 5, 600 opportunities a year may be executing 40 or 50 of them, but I would argue that much of this is a quality issue.
Opportunities in oncology and is the Biotech business model broken?
Fintan Walton:
Right. So if I could go to Todd Maclaughlan and ask the question you head up Negotiations for oncology, oncology is one of those huge areas there must be lot's of good opportunities in oncology after all that's the one of the biggest hottest areas that most of the biotech companies are in?
Todd Maclaughlan:
Well I think so but I am not sure that's exactly the case, I think at the end of the day there is a lot of products that may cure cancer in mice but having trouble with humans. And you know the only " we can get mice to get the healthcare card I think could change the dynamics a lot. I think there is still a few good opportunities that are out there and I think you are right that there is a bidding process or a auction process that goes on for really good assets and you know assets that are not either and have not yet reached proof of concept or just having some baggage with it you know jump is still jump and know what the price is, so I think we still need to go through our internal processes is to what the value of a " to a company is, we still have a gap coming up in 2014 and beyond that we need to fill we still need to work with biotech companies but we need to focus on quality assets and I agree with that just one of the things I need to do.
Fintan Walton:
Are we seeing Todd Maclaughlan the demise of the biotech business model, is it if it's not as productive as it is today as we needed to be as you just pointed out, is it broken and doesn't need to be fixed?
Todd Maclaughlan:
Yeah I think the model is broken in fact you are the talking about the J.P. Morgan conference and I think of the big differences I saw you know versus a couple of years ago when you had a biotech company they didn't wanna talk to you, they said we don't need big pharma we can go out and we can raise more money if we need to, we can build the sales and marketing organization. And I think that's changed now the venture capital community and the investor community don't want to fund specialty pharma companies to have those companies learn about sales and marketing and develop " and specially in the oncology area where you can get lost in the (indiscernable) pretty quickly in terms of what your focus should be, so I think that's changed dramatically and I think that's nice that we are talking to companies now and I think that the business may actually work more efficiently now that the interest are aligned.
Fintan Walton:
So if I could go back to you, if you pass the mic back. If I could go get back to you Rob Wills I mean when I talked some biotech companies and some of the VC's they say to me well you know its big pharma who want these products so they should come in and change became and adapt to make sure that we can actually be good suppliers of opportunities, so I am not saying whether that's a good question or bad question of comment, but can pharmaceutical companies adapt and change so that they can insure that in the future there is a stronger pipeline or do we just leave it to the market?
Rob Wills:
I think that business model will work if there are products, but you have to I mean my perspective on all this is the science that we are using today is still the same science we were doing in the 50's, find target, find the drug develop it and sell it. And that science even though the biotech has come in and you have all the bioinformatics all tools available, I think it's running it's course I think it's starting to like a lot of technology it's starting to plato, very few opportunities are coming in there is a very few ways to change it and what is " where as the science is going we have to move to is some revolutionary change that is going to impact predictability and disease stage modification, because you are just " we are just trying to find drugs that you know treats symptoms or help in a same old way we have done it for 50-years, 60-years and I think that may be why we are seeing less opportunities. So can big pharma change you know I don't know of it's big pharma " I think big pharma and biotech together have to deal with this. And we both face the same problem we need biotech, biotech needs big pharma, it's a combination problem that we gonna have to sort out and I don't know I mean it's I don't know when it's going to happen or how is going to happen but
Fintan Walton:
Okay. Thank you. And if you can pass that mic to Stephen Potter and ask a question to"
Todd Maclaughlan:
I just want to make a comment. I actual think that has actually has changed from you know 30-years ago where it used to be the process was finding the target in the first place. And that's no longer the issue, the issue is there is lots of targets out there and in fact there are many people working on those targets and the issue now is, is the speed of innovation has changed dramatically because of the genomic revolution that's gone on you get to the answer and the answer may be wrong which you will find out sooner, so that you, you know you can go from early stage to you know your proof of concept pretty quickly but then so as everyone else do the same thing, so I think that's changed from what it was before and it's really getting harder to figure out what not only what is the right target because I think there is a lot of high value targets certainly in oncology, but what is the right mechanisms for that and the profiles of the drugs that we are looking for you know we a Gene-tox Screens that we didn't have before we know more things that are good and bad and not just and it's harder to make some decisions sometimes.
Clinical trials and the tougher regulatory system.
Fintan Walton:
Okay. Well Stephen Potter again Genzyme is a very special type of company fits in a in it's own class if I could argue that and so you are not quite a big pharma but you are large biotechnology company with very specialist areas and focus, are you the company of the future?
Stephen Potter:
I think it's an interesting question about how you know where this industry is going to some an analogy that I often use is initially there is small molecules and we found the easy stuff and it got harder and harder and harder and then biologics came along and we found it easy stuff and now a days it's really hard to find a small molecules you can find on the words but it has tox issues I mean invariably and with the biologics you tend you find things that don't have tox issues but they don't work, now question is what is the next step? And I think now we've actually been in a situation where we have invested in gene, in cell therapy, in personalized medicine for some period of time and I think perhaps to some criticism but I very much believe it there is going to be a step change in the way things get done, but they are gonna include these new technologies and new ways of approaching medicine.
Fintan Walton:
If I could just ask question to Todd because you've mentioned how important innovation is and you've mentioned how science has changed and so forth but have we lost some important ingredient here, we are very good at finding as you said finding those targets but it's the clinical and the regulatory environment that has not had any special attention in fact if anything the clinical and regulatory environment has got tougher so you may have great science, you may have great discoveries, you may have great opportunities coming through but they fail because our regulatory system isn't good enough?
Todd Maclaughlan:
Yeah I think the you know the introduction of regulatory fees to get application review faster has helped to some degree at least earlier on I am not sure I think it's become another revenue stream at the current time, but I think it really comes down to the data that's been generated around molecules is more than it used to be, again we talked about the tox data, on the oncology side the tox data is not as important as it is because these patients may live months or a few years not necessarily you know worried about what might happen in 10-years from now but it's changing as the science gets improved but the FDA also has access to the same information that we have. And sometimes we can't explain the results you have or you need to try to work around some of the tox issues, so I think that's changed from what it was before.
Fintan Walton:
So do you want to make a comment on that Rob Wills?
Rob Wills:
And so my view is on the regulation and the clinical trial PC's we do need regulation okay I am not someone against it I think they've made the hurdles higher because the standards for safety have changed, but you are pointing out something that is fundamentally our problem with business is that no matter of how much the science has improved, the risk is still there as it always have been, it's a high risk business more things fail. Second of all it's we still don't have predictability in humans we have to go through all this laborious trial works to find out the damn thing works. And that is what is going to be causing such a problem it's costing more, it's taking longer, the hurdles are higher and we have to find a way to do this business differently or it's going to be just impossible.
Deal structure and funding models.
Fintan Walton:
So you just keep the mic from them Rob Wills because I am going to ask you a question?
Rob Wills:
Sorry.
Fintan Walton:
No, it's a good question you will be pleased to hear, I believe but is a question around this vary important point about let's accept that the regulatory issues have got tougher that to get a drug to market is less likely, so if we in that environment then we need to use the favorite term more shots at goal therefore we do need a biotech industry that is able to generate enough leads so that we know that in fact of anything we need to have greater number of products coming through so we have the chance of getting a product over like through to clinical trials or through into registration and up to the market. So going to the deal making aspect here are there things that deal makers can do between pharmaceutical companies and biotech companies that could potentially assist that and I will give you an example where by may be if a pharmaceutical industry " pharmaceutical company showed more interest it doesn't have to be a big financial commitment at some interest there is some other products coming through and say yeah we like this product gave some support to that there may be investors can raise their confidence in the biotech companies if they are trying to invest, so if you can create an environment in which investors can come back to the biotech industry and say yeah I can see a return on this, can we do that?
Rob Wills:
Yeah we can do that but you know it comes down to because it got only some many dollars to go around you are going to do the valuations both on the technology and on the, on potential return and if it makes financial sense is to whether your whether talents your company has for that you will invest and you may stage your depending on how much risk is there, but I think for the big pharma then say we are just going to have the sort of part of money or some sort of ability to help fund things to get confidence, I don't think that's gonna happen.
Fintan Walton:
But I suppose with the earlier the topic I am bringing into is more risk sharing between pharmaceutical companies and investors, so pharmaceutical companies don't have to spend huge amounts of money?
Rob Wills:
Well I think you are seeing there was some of these alternative models that are out there in terms of we talked about Lilly has been doing with some companies, I think you are seeing a lot of this potential to risk share which helps spin outs there and allows you to get you know some traction on the technology that you hope might make it.
Fintan Walton:
Right. And so that would be what an arrangement between CRO and a neighbor investor?
Rob Wills:
Or a venture you know venture firm or hedge fund or something like that, but you are actually investing together, your goals are different you know we want a product that venture people want a return and but that's expensive money.
Fintan Walton:
Right. So if I ask Stephen Potter, have you seen those sorts of deals and what sort of deal making do you think our industry needs to move towards in order to try and overcome some of these issues?
Stephen Potter:
Well I think, we are all seeing these types of deals but people are trying to find different ways to finance the industry, it's an expensive industry to finance, but I want to go back a little bit in this you made a comment that if we could just fund these things more things would happen and I think you know we don't have a problem with it's my point of view, we don't have a real problem with the FDA we have a problem with products and the rule of thumb is if it doesn't work run a bigger trial and if you have something that will really make a difference really change the standard of care well any problems getting clinical trial done they don't have any problems for the most part getting through the regulatory process. And I think what's interesting to me is increasingly I hear about people taking a de-risked model which is they take an old drug and repurpose it somehow and expect us to say this is wonderful and really it's a very modest improvement over what might be available today. So I don't know, I think it really comes back to this is a risky business and if you want a higher reward you have take some risk. And I think we've gotten away from that to some extent. So having " going back to your original question we do all sorts of deals in terms of how we structure them and I think " the thing that I hopefully will see more of which is what we try to have data all time is not just about the money, now obviously that's important but it's also about the kind of capabilities that we can bring to there on a product and if you don't have to invest in infrastructure or commercial sales capabilities or reimbursement or we know how to get reimbursement for small orphan type products in a way that probably nobody else does, that's enormously valuable. And yeah too often we hear people say we just want a big upfront don't really put any value on what you can contribute and that those deals don't work very well.
Fintan Walton:
Right, I can ask Todd a question around this we are really basically talking about substantially the funding gap between innovation and getting a product into clinical trials which is largely the big, the big area of concern in our industry. If we look at the not for profit organizations, the universities, the research institutes and so forth may be one criticism is that they in the past they spun out too many companies, created too many little entities that needed big funding, are there things that we can do in the industry which encourages more of the products and opportunities to stay within those research institutes and not for profit organizations so they can mature to a stage without the need to spin them out into new entities, in other words can we come up with deals structures and funding models big challenge that will enable our industry I mean our industry meaning we can get products in the clinical trials?
Todd Maclaughlan:
Yeah I am not sure that's my expertise to answer that question to be honest with you since I tend to focus on things that are post proof of concept and hope that the scientific community and the NIH and those things " I think there is a lot of funding going into that. I think you detailed on the point where it was very easy to spin out you know two men in a molecule into a new company with an idea. I think that's changing, I think part of the reason that started in the first place was two reason one is to get the attention of a large company and idea with two men and a molecule is not enough to go through our internal bureaucratic processes and standard that we have. So I think that's what started it, I think it get out of hand a little bit with the availability of money and just like the housing markets gonna probably collapse back to itself. But I think that I think in general that concept can work and it's funded through the scientific now we still are interested in good science, Novartis has a presence here in Cambridge looking at early stage technologies and we interact with universities and experts around the world, so I think we do that and I think we do that well. I think that I don't think industry should be funding that necessarily the early stage I think science should be driving, driving the decisions.
Contribution of Alliance Management in productivty and deal making.
Fintan Walton:
Okay. Now I am gonna ask question for you Rob again and with your alliance management pattern, obviously you've done deals and you've got deals underway of Johnson & Johnson that's an outstanding company it's no doubt and is part of the solution from a pharmaceutical company and from a biotech's perspective in the alliance management stage because if you can find a good product you usually have found a good company and therefore you can through the alliance management system build stability and build help to build a company that could be productive for a company like this?
Rob Wills:
And so the question is?
Fintan Walton:
The question is can alliance management the question is how much of contribution can alliance management make in terms of insuring that we have a higher level of productivity and a higher level of deal making because once you've done a deal with a biotech company it's got a good product it's usually a good company and therefore hopefully you can get more products out of that company
Rob Wills:
Yeah I think.
Fintan Walton:
Comment on that?
Rob Wills:
I think alliance management in this industry has two benefit to deals and the outcome of it, one is during the negotiations period because alliance management has the ability to share with the deal negotiation structure things that work and don't work and mistakes have been made and how to fix them, so that you are improving these deals going forward where two partners get together and often with very different cultures and expectations and financial needs. And you try not to repeat mistakes that have been since we are wrong. The other piece is once the deal is done we have they instead of helping build the company they ensure they had you take all of the non-essentials that are not related to a technology off the table and allow that technology to make it on it's merits or not, because as we all said it's a high risk business most things are going to fail. But you don't want personalities and differences on issues to interfere with that ability for that technology to make it or not. So I think it's really one is you know making sure that we learn from past mistakes and then being able to insure that when it does go forward you clear the decks for all the issues and things that could do really and allow it to go forward and then in the end I guess both companies if it works will share in the success and probably would be better for it.
Fintan Walton:
Todd Maclaughlan, you want to make comment on that?
Todd Maclaughlan:
Yeah. So I think alliance management should be more than a function, it's actually a way of doing business it is that you believe on alliances and you do what's right for the product and you do what's right for the program or you believe an alliance management is to keep the other guy away from your program when you take it over. And I think we've all experienced that with our management teams going forward, but I think that's changing you know " let the biotech company do what they really good at, inventing new technologies, doing the studies quickly, making decisions quickly and try not to you know key that process at the same time make sure that you're maximizing you know the clinical study design, but lot of times biotech companies will rush towards new clinical program and by rushing through too fast they are going to end up with tox problems down the road or other you know on incomplete data package et cetera. I think that's what the big pharma companies can bring is that understanding of the entire process and alliance management I think really is about managing the relationship I don't, lot of times in rushing towards the deal you tend to you know "oh yeah we have this alliance management structure, we have a Joint Steering Committee in role you know, you look all these agreements all look the same". It's not about the words it's about the philosophy and do you really believe that we are going to work together and make sure that this structure is there and then you are making decision that the team level not everything goes up to the President's of both companies to argue and then sue each other at some point. So I am sure you can talk more about than I can, but
Fintan Walton:
So, I mean basically you are saying it has to proactive rather than reactive even at alliance, alliance management can't just be as a process, but in the end how can alliance management assist in making sure that biotech companies have survived? Are there isn't there a potential conflict of interest?
Stephen Potter:
It's seems like alliance management can help you succeed, but it's not gonna turn a bad product into a good one. And I think there is a general theme here about you know all those who are focused on where we can find ways to act on products that are important and to your point we all of us have commitments to (indiscernable) when we say we are going to go our top-line at X percent and bottom-line of, everything outside fit in the middle. And so when we bring something in we either have find a greater way to finance it or we have to display something else and the argument has to be that whatever bringing in is better than what we are taking out. So I think that's again alliance management helps you solve the problems going because there are so " it is massive culture differences between the big company and small company and having the right people involved just move those over is critical as it can explode on you but it's not going to change the value of the product.
Todd Maclaughlan:
Just to add that, I think it used to be that you use to do a deal, the deal person have thrown over the fence and then walk away on to the next deal and so all the synergy discussions and the modeling you did in terms of what makes sense and what value you en captured got lost in terms of that. So I think having alliance management at the negotiation table is important to make sure that the intention of all parties is continued throughout and that there is many champions within an organization sometimes it's you know a single champion and then he leaves because he goes on to another organization you know the future organizations as might be, but I think it's important that the deal contract upfront is maintained through the alliance management from both sides.
Big pharma company opportunities and licensing to biotech industry.
Fintan Walton:
So when we talk about deal making and all the conversations we've had so far are about biotech products or opportunities moving into big pharma companies but what about the other way around shouldn't big pharma returning to it's own ladder, if I could say that and look for what opportunities and get back to the biotech industry which can be suitably funded, I mean this has been talked about for years, we all know that there are good opportunities there and one of the big obstacles for this is who inside the corporation is gonna put up the hand and say I am prepared to out license this to some biotech company as usually the reaction is why you giving away our assets?
Todd Maclaughlan:
Well actually I think the decision is, is better to be thoughtful than to be (indiscernable) to give away your assets, so if you sell something and they do poly with it but you made it money on it then you look like a hero if you do something it turns out to be a blockbuster you know I was with (indiscernable) we in licensed Depo, Depro was the 18th anti-inflammatory in the marketplace at the time, it was twice a day tablet you know big huge tablet versus all the other one today's and we actually in license that from Wyeth which have Lodine and basically the internal assessment was that(indiscernable) was a better product you know get rid of this all product Depo became the number one anti-inflammatory in the marketplace, I am sure somebody at Wyeth wasn't very happy but that happen at some point. And I think it's that there is no credit system built into larger organizations to patch yourself in the bag for selling an asset that no cares if you selling that. I think thats where we are coming down to mostly we wont see this.
Fintan Walton:
Actually, well that's gonna just mention that Novartis was one of the companies that did very early stage with the company called Speedel [PharmaDeals ID = 30726] when Novartis was formed out of Ciba-Geigy and Sandoz [PharmaDeals ID = 218] and that turned into a success story. So there are examples where that can actually work in the favor of the company itself with Novartis of course Speedel.
Stephen Potter:
It's seem to be they tend to be focused on products that are marketed already for most part and sometimes they will build a pipeline behind it but it has a an anchor product that allows the Newco to be successful and lot of the times those are based on management teams within the existing company taking something outside actual think you right on it, but there are lot of products within large pharmaceutical companies that they are not positioned to sell properly and if they may be a smaller biotech's and all who have a different selling process who can target the audience differently or more effectively, but you know I was gonna ask the question about how many in this room would actually like to volunteer for an out licensing project and it's " it is sort of a thankless to ask and you know it's really is very much of the or somebody wants it they must have value so we should keep it. And so we've tried a lot to try to identify products in big pharma say we have a sales force, we have an infrastructure that could maximize the value of this product let's try to find something and we can't get the time and attention.
Fintan Walton:
And most of the spin out companies are from individuals who use to work within this organizations?
Stephen Potter:
Yeah, yeah.
Fintan Walton:
And I would like to conclude. And thank you very much all three of you for answering those questions and we would like to thank you in this usual way. Thank you.
Todd Maclaughlan
Head of Negotiations
Rob Wills, is the VP Alliance Management at Johnson & Johnson. Stephen Potter, is presently the SVP Corporate Development at Genzyme. Todd Maclaughlan, is positioned as Head of Negotiations, Oncology Novartis.
Johnson & Johnson
Johnson & Johnson has been a part of people's lives for more than 120 years and a valuable part of their investments for more than 60 years. Founded in 1886, we listed our shares on the New York Stock Exchange for public investors in 1944. During our history, we have built the most comprehensive base of health care businesses in the world, generating more than 70 percent of our revenues from No. 1 or No. 2 global leadership positions in our respective markets. Our consistent performance has enabled us to deliver an exceptional track record of growth that few, if any, companies can claim: 76 consecutive years of sales increases; 25 consecutive years of adjusted earnings increases; and 47 consecutive years of dividend increases. Genzyme One of the world's leading biotechnology companies, Genzyme is dedicated to making a major positive impact on the lives of people with serious diseases. Since 1981, the company has grown from a small start-up to a diversified enterprise with more than 12,000 employees in locations spanning the globe and 2008 revenues of $4.6 billion. In 2007, Genzyme was chosen to receive the National Medal of Technology, the highest honor awarded by the President of the United States for technological innovation. With many established products and services helping patients in nearly 100 countries, Genzyme is a leader in the effort to develop and apply the most advanced technologies in the life sciences. Novartis We believe our portfolio best meets the varied and often complex needs of patients and societies. Novartis is positioned to lead in innovation, partner with others and offer solutions to patients across a broad healthcare spectrum. In addition, a diverse portfolio reduces financial risk, bringing greater value to those who invest in our company. Novartis has been transformed since its creation in 1996 - when only 45% of net sales came from healthcare - into a leader focused on fast-growing areas of healthcare.