Reed Smith LLP: Andres Liivak on the Effect of the Financial Crisis in Deal-Making Terms




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Video title: Reed Smith LLP: Andres Liivak on the Effect of the Financial Crisis in Deal-Making Terms
Released on: August 24, 2010. © PharmaVentures Ltd
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In this episode of PharmaTelevision News Review, Fintan Walton talks with Andres Liivak, Partner, Life Sciences Business and Transactions at Reed Smith LLP. Filmed at BioChicago 2010 in Chicago, USA, they discuss:

• The impact of the financial crisis on pharma industry and key changes over last 24 months

• Risk mitigation and changes in deal types

• Risk sharing in deals

• Deal terms in situations of financial crisis

• Advice for biotech companies going through funding difficulties

• Andres Liivak's perspective on the future of biotech industry
Impact of the financial crisis on the pharma industry and key changes over last 24 months
Fintan Walton:
Hello and welcome to PharmaTelevision News Review here at BIO International Convention. On this show I have Andres Liivak, who is a Partner at Reed Smith based in New York at Princeton, welcome to the show.
Andres Liivak :
Thank you Fintan.
Fintan Walton:
Andres, you are a lawyer and you get involved in deal making in the pharmaceutical and biotech sector, you've done for the both large pharmaceutical companies as well as biotech companies, there is no doubt that in 2010 we are recovering from one of the severe financial crisis to hit the world, it has an impact on biotech, it has an impact on pharma, from a lawyers perspective what are the key changes that you've seen happen in the last 18-months, 24-months?
Andres Liivak :
I think we've seen a tremendous increase in the amount of risk mitigation devices being used in transactions both in the collaboration setting or the prevalence of option deals in the sort of risk miles turning out within option deals and the like has really taken hold, but that's also blended over into the M&A space. So traditionally when you did an M&A deal it was a clean exit and you would get a lump sum and may be some earn out and may be some escrow but it would be very time limited. Now we are seeing that there are milestones that look not dissimilar from a collaboration set of milestones in an M&A exit, so the lines between the two become blurred and in the M&A setting sometimes it is not a clean exit anymore as well.
Fintan Walton:
Right, so lot of the value is trapped still into the future?
Andres Liivak :
Exactly, so you want to use M&A as an exit point so that investors and the folks in the company can move on to their next venture and it's not so easy anymore and at the same time of course as you know the IPO market has been very difficult and it's given people being who are the buyers more leverage.
Risk mitigation and changes in deal types
Fintan Walton:
Right, so there are risk mitigation devices put into agreements now as you say and equally are you seeing a change in the behavior of the types of deals between different parties and we were at a panel discussion here at BIO yesterday which you moderated and you were talking about risk sharing with CRO's, how prevalent is that becoming?
Andres Liivak :
I think as we discussed yesterday it's a challenge because that is a moving target people aren't sure which of these CRO, private equity pharma arrangements are going to take hold and exactly how to best go about doing it, so I think people are trying many different things seeing which ones take route the best and for example we spoke to several big pharma that had historically have tried these things but they are moving away from bilateral deals, I think there is a desire to have more of a network set of deals where it could be a three way transaction where you have money coming in the hub lay off some of the risk. And then if you look at what some of the Indian pharma's have done they really would prefer to set up a networked range of the kind, but of course the problem is when you are moving core competencies outside of the firm, the pharma firm industry and you are moving it into multiple parties interacting that creates a very difficult set of contracting issues, and how do you and I work together longer-term collaboratively in a trusting setting as opposed to a one off transaction, and so my answer has been to a lot of people that what you want to do is set up a series of arrangements, you build trust overtime, you build a relationship that grows and that we have to continue to work together in a positive way, because if we don't this longer-term relationship will then fall apart and you will be hurt long down the road.
Risk sharing in deals
Fintan Walton:
Right, so just coming back to contracts themselves these days, because of these issues, because of the potential for bankruptcy of biotech companies, because of the high risk drugs going through the clinical development in another words embedded in any agreement there is a risk of failure are we seeing a change in the contracts themselves, I mean are they getting longer, are they getting more complex you've talked about risk mitigation clauses?
Andres Liivak :
Yes, I think certain parts it's always a battle of what you address in that contract, if you try to address everything you gonna end up with the telephone book it's a unmanageable and it really is not helpful to the relationship because at the end of the day a lot of these things are about relationships. And so but to your point they are focusing more on certain kinds of risks specifically I think diligence type risks they are using the milestones to make sure the product is succeeding and at the right level of efforts are being presented behind it, and also giving the parties the ability to back away from the relationship and may be redeploy assets together to another target, so it's like a multiple target relationship so that we are not so fixated on the one opportunity that may lock us down that will really better off putting the effort and the money on other things that turn out to have higher value.
Fintan Walton:
Do you think in the end we are doing smarter deals?
Andres Liivak :
I certainly hope so, you know I think that is, that's got to be everybody's goal I mean there is a lot of pressure on the system both in healthcare reform and the financing environment to do things better, to do them more efficiently and I think the smart companies are they learn from the past, they learn from their mistakes and mistakes of their partners and try to imbue that into their deal making, I mean you and I have you know have been in the space for a long time and that is sort of the way we go about doing it, we are always trying to learn and do things better.
Deal terms in situations of financial crisis
Fintan Walton:
Sure, now I mentioned obviously the fact that we've gone through a financial crisis here in the US and in Europe and elsewhere, funding for biotech companies have has dried up to a large extent and even biotech companies are going bust, now a law firm like Reed Smith what have you seen and do you actually get involved in those sort of sad situations?
Andres Liivak :
We have in a couple of different situations, we've been in the last year and a half particularly not surprisingly involved over a couple of collaborations where the partner was running out of funding, had difficulties and some went bankrupt. Our client thought about getting involved may be buying some of the asset but decided not to on one instant, current case that we were working on party files for Chapter 11 last Friday, we are representing a client who is a stalking horse bidder in that deal that's not public, but they will be buying hopefully some assets you know should the deal sign, and it's a very different dynamic buying assets from a company that you know is on their last legs and it's you have to still worry about a lot of the same life sciences risk, due diligence risks that you normally would, but the deal terms are quite different there your approach to reps and warranties are different, closing conditions that there you have to be very careful because this entity is not gonna be around. So it's kind of like you got what you've got and so you need due diligence process needs to be a little bit more focused and you talk about risk mitigation because you have difficulty going beyond closing, you have to get before closing what you can get and selectively pick your battles and so in the end it's a different kind of a game.
Advice for biotech companies going through funding difficulties
Fintan Walton:
Right, because you know obviously filing for Chapter 11 is a big event for any company?
Andres Liivak :
Sure.
Fintan Walton:
Are there lessons there because there may be biotech companies that are listening and watching this particular program is it wise to start making that move earlier so that you or even preparing yourself in advance, because the key thing with biotech companies is just not a question of assets, the intellectual property rights we see them at the filing cabinets it's also the people so the value is when the people mix with the intellectual property, so are there is there advice that you can give to a biotech company that may be going through these sort of difficulties?
Andres Liivak :
Sure, I think it's gonna depend on the company, right. So if the value and where the value is, if the value is in a couple of marketed products as opposed to a development such as innovation then it's that you've got some assets that you can sell. And probably the operation not so much and so they are not going to happy the people though unfortunately, but the investors the owners may well want to head towards an exit a bankruptcy exit or other exit before they run out of money, so that they can get something out of it rather than running completely.
Fintan Walton:
Into the wall?
Andres Liivak :
Into the wall right, I mean because you need to leave some and that takes time. And what I what we've observed is that it is if you've never been through that process it is surprisingly challenging, the amount of paperwork, new kind of work intelligence that one has to perform specially if you are a public company going into that space it's challenging. We have one of the largest restructuring practices in the world Reed Smith together with our leading life science practice and we have been working together with the folks in the New York at some of our other offices all these things and it's been a challenge for the other side when they've been heading into bankruptcy. I think if you have a development stage company with employees and operations that's a different, that's a much more challenging sale, you need to you know you don't sell employees there you have to incentivize them the comp and retain them and the operations whenever you are dealing with human beings is much more complicated then may be known or be a risky scientific R&D.
Fintan Walton:
And those individuals may already have sensed something going wrong and they've already gone and working for another company?
Andres Liivak :
The good ones you would think, right and say you really have key employee risk and know-how trade secrets, it depends on how complicate, there is a complicating manufacturing situation those are the kinds of things that are very difficult to move in a normal setting and you put this extra pressure on and it gets that much more challenging.
Andres Liivak 's perspective on future of biotech industry
Fintan Walton:
Sure let's move into more positive territory hopefully and look at the future Andres, because you know clearly we are here at BIO we can see the pharma companies here, we can see the biotech companies presenting and so forth what do you see when you look into the future, I mean we've talked about hopefully people doing better deals, from a lawyer's perspective looking at the industry and what it is doing right now what's your vision, what do you see going forward and can we be hopeful for biotech going forward?
Andres Liivak :
Sure, I mean my view is I think we are going to see more deals, more transactions, because I think the era of a large vertically and horizontally integrated organization is I think that's tapering tapered down. And I think we are going to get more medium sized organizations with some financial help perhaps from private equity and then other sources interacting with one another and whenever you have that you will have more contracts, so more transactions. And so what you gonna get at my view is you're gonna get more of a networked effect, I mean certainly this you know this is all about networking but it is I think is moving more in that direction and so that the key in setting up these relationships is how, you know to go back to what we talked about earlier how do you set up these relationships a web a complicated web that can still get these assets from discovery through the clinical development stages, through the critical manufacturing phases, pre-commercialization and then the commercialization phases worldwide in the emerging markets just as much as we wanted in the US, and Europe, and Japan the traditional major markets we now we got to get into Brazil, we got to get into Malaysia, India, China and how do you set these contracts up in a way where they are workable, they are efficient, they are actually somewhat dealing with the issues that are gonna come up in over the course of the 5 to 10-years as these contracts last. And so there is more I think integrate work to be done on setting these things up, and it's going to be lot a challenge but the one that I look to participate and hopefully soon.
Fintan Walton:
Okay, well Andres Liivak, thank you very much indeed for coming on the show.
Andres Liivak :
Thank you very much.
Fintan Walton
Dr Fintan Walton is the Founder and CEO of PharmaVentures . After completing his doctoral research on the genetics of cell proliferation at the University of Michigan(US)and Trinity College (Dublin, Ireland), Dr Walton gained broad commercial experience in biotechnology in management positions at Bass and Celltech plc (1982-1992).
Andres Liivak
Partner
Andres Liivak practices in the area of Life Sciences Business and Transactions as a partner in Reed Smith 's Corporate & Securities Group. Reed Smith is a top-15 global relationship law firm with more than 1,600 lawyers in 23 offices throughout the US, Europe, China and the Middle East. Andres Liivak and his Life Sciences Transactions colleagues who are a significant part of this multi-disciplinary team are experts in bringing together partners in the industry to build productive research, discovery, development, manufacturing and commercialization relationships through critical collaborations, licenses strategic alliances, acquisitions, divestitures and other operational transactions. Andres Liivak 's prior representations in the life sciences industry have encompassed M&A, complex collaborations and strategic alliances, critical intellectual property licenses, product acquisitions and divestures, intellectual property-focused settlement arrangements and other deals of strategic importance and value, as well as numerous operational and supporting transactions that have involved biotechnology, pharmaceuticals, vaccines, medical devices and emerging life sciences technologies.
PharmaVentures
PharmaVentures is a corporate finance and transactions advisory firm that has served hundreds of clients worldwide in relation to their strategic deal making in the pharmaceutical, life science and healthcare sectors. Our key offerings include: Transactions / deal negotiations; Product / technology valuations; Deal term advice; Due diligence & expert reports; Strategy formulation; Alliance management; and Expert opinion for litigation/arbitration cases. PharmaVentures provides the global expertise to ensure our clients generate the highest possible return on investment from all their deal making activities. We have experience of all therapeutic areas and can offer advice on both product and technology commercialisation.
Reed Smith
Reed Smith is a top-15 global relationship law firm with more than 1,600 lawyers in 23 offices throughout the US, Europe, China and the Middle East. The firm's life sciences attorneys are comprised of 200 professionals across numerous practice areas who are dedicated to clients who help save patients' lives and preserve their health. Reed Smith represents many of the world's leading companies in complex litigation and other high-stakes disputes, cross-border and other strategic transactions, and crucial regulatory matters. Based on the results of a survey of large and Fortune 1000 in-house counsel, the BTI Consulting Group ranked Reed Smith among the top 5 firms for client service. The Lawyer named Reed Smith its runner-up for U.S. Law Firm of the Year, and The American Lawyer named Reed Smith "Litigation Department of the Year" in the product liability category. Asian-Counsel named Reed Smith Hong Kong office "Firm of the Year" in two categories, Commercial Transactions and M&A.