DeloitteRecap Torreya 110612webinar OptimalTimetoPartner

Deloitte Recap Webinar Series
Licensing Insights: Generating Better Deals, Faster
November 6, 2012 Deloitte Recap LLC www.recap.com
Agenda
Introduction to the Licensing Insights webinar series Strategies knowing what you want; establishing what you can get Mapping key deal criteria to the strategy Every deal is a special deal case studies
Eric Walczykowski
Recap Business Leader, Deloitte Recap LLC
John Cullity
Principal, Torreya Partners
Mark Simon
Principal, Torreya Partners
Lisa Natanson
Senior Analyst, Deloitte Recap LLC
David Ghesquiere
Independent Business Advisor
Insight into Action | www.recap.com Copyright 2012 Deloitte Development LLC. All rights reserved.
Module 1: Determining the Optimal Time to Partner

Transaction timing drivers Value inflection recently achieved / anticipated over coming months Comparable transactions successfully effected Investor liquidity requirements / demands Key operational factors for consideration Asset specific strategy Evaluation of domains of developmental risk Access to capital Balance Sheet Current Investors Capital Markets Alternative partnering strategies Non core geographic territories Alternative therapeutic applications / LCM
Module 1: Determining the Optimal Time to Partner

Data analysis Case histories: Assessing the transaction landscape for deals of similar qualitative type (e.g. therapeutic area, stage of development, geographic region, deal architecture) Financial comparables: upfronts, milestones, royalties and total deal Related case studies Small biopharma with single Phase I small molecule asset; breast cancer North Asian regional transaction: Keeping the program alive Phase II trials results missed primary, achieved several secondary endpoints POC success or failure, or neither? Regional transaction with local development and commercialization rights negotiated, with potential participation in broader regional geographies Result: Cost mitigation and further program maturation
Business Development Strategies

Preparing for the sell-side market
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Copyright 2012 Deloitte Development LLC. All rights reserved.
Licensing Process Matching Strategy to Context

An integrated approach to addressing the entirety of the business development process, from assessment of strategic options through to alliance management of completed transactions
Strategic Analysis
Documentation
Valuation
Term Sheet
Negotiation
Contract Structuring
Alliance Governance
Assess current assets vs. strategic plan Assess market/ patent situation Refine clinical strategy Refine Capital Markets Strategy
Develop Call List Teasers Develop Slide Decks Prepare Diligence Materials
Model construction based on NPV Analysis Asset benchmarking
Deal structures Creating term sheets
Due diligence: Document review Evaluation Preparation; what ifs Financials Plan: objectives, strategy, tactics
IP, contracts, Ownership structure, Liabilities/ assets; Business plan
Bi-, multi-lateral, hub-and-spoke Steering committee(s) Designate managers Dispute resolution: - Renegotiation - Disengagement - Arbitration, - Litigation, - Termination
Module 2: Determining the Optimal Partnering Package

Major core elements for consideration in partnering documents Preclinical Clinical Regulatory CMC IP This will be the focus of the next webinar Commercial addressing Communications Partnering documents for development Teaser (non-confidential memorandum) Non-confidential deck Confidential deck Electronic dataroom
Module 3: Determining the Optimal Partner

Effective assets matching between buyer and seller significantly increases the probability of transaction completion Pairing occurs on several domains: therapeutic area, stage of development, cost of downstream clinical trials to name a few We have captured these domains for some 900 active buyers of biopharmaceutical assets Discussion of our approach and the associated module will take place during the third webinar of this series
The third webinar in the series will address Interested Parties
Module 4: Determining Asset Value

In our view, a good part of the value is created by the clinical, regulatory, CMC and IP surrounding an asset. However, economics are founded upon the capacity to rigorously quantify and communicate asset related value. Consequently, we gravitate to comparables based analysis afforded by databases such as Recap by Deloitte and product related forecasts. With regard to the latter, we often advise our clients to consider commissioning primary market research to consolidate an understanding of net (or reimbursed) price and projected demand. Experience tells us that rigorous valuations work effectively, anchors the economic dialogue, and often represents a catalyst for transactions. Commercial assessments will be the topic of the final webinar in this series, Valuations
Data Analysis
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Upfront Payments vs. Clinical Risk

When is the right time to license?
Upfront Payments Increase by Stage

Phase I to Phase II brings the highest increase in upfront
$120
Worldwide (All Major Markets) Median

$100
$102.0
Median Upfront ($M)
$80
$60
102% increase in median upfront at Phase II

$34.4 $17.0 $2.0 $7.3
Preclinical Phase I Phase II
$60.0 $43.0
$40
$20
$0
Lead
Phase III
Registration
Approved
Stage of Asset at Signing

Worldwide deals (all three Major Markets) from Lead through Approved stages disclosing the upfront payment Product and Technology licenses signed from 1/1/2009 through 7/15/2012 * Major Market Territories include ANY of the U.S., Europe, or Japan; Worldwide territory includes ALL of the US, EU, and Japan
Data Source: Deloitte Recap LLC
11
Clinical Attrition Rates Decrease by Stage

Failure rates are highest in Phase II development
1,482
21%
1,167 -315
Number of Pursuits
62%
More than half of all indication pursuits will fail at Phase II
17% Approval Success Rate
447 -720
36%
286 -161
12%
-34
252
Phase I
Phase II
Phase III
Regulatory Filing
Market
Development Stage of Asset

This "waterfall" graph shows the number (and percent) of clinical projects entering each Phase of development (blue bars) and the number terminated at each Phase (red bars) only pursuits that have reached a definitive clinical development outcome of Market or termination are shown; ongoing efforts are not included. The data are real clinical attrition rates for products sponsored by 316 biotechnology companies.
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Phase II Attrition Rates by Therapeutic Area

Attrition and success vary by disease
Oncology (n=590) 73%
Autoimmune/Inflammatory (n=106) 62%

Neuroscience (n=143) 60%

14% Approval 13% Approval Success Rate Success Rate
Infectious Disease (n=173) 51%

20% Approval Success Rate 21%
cumulative success rate
Insight into Action | www.recap.com Copyright Deloitte 2012 Deloitte LLC. All rights reserved. Data Source: Recap Development LLC
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Upfront Payments Versus Risk

When is the right time to in-license or out-license? 40% increase in upfront
payment
$120
(US$M)
Worldwide (All Major Markets) Median

$100
Phase III hurdle (reproducible efficacy) cleared 12% Regulatory risk ahead
$102.0
Median Upfront Median Upfront ($M)
25% increase in upfront payment

$80
Phase II hurdle (Proof of Concept) cleared 36% Phase III risk ahead
$60.0 $43.0 $34.4 Phase III and Registration are favorable for Buyers Phase II is optimal for Sellers
$60
102% increase in upfront payment

$40
Phase I hurdle (safety) cleared 62% Phase II risk ahead
$20
$17.0 $2.0 $7.3

Preclinical Phase I Phase II
$0
Lead
Phase III
Registration
Approved
Stage of Asset at Signing

Worldwide deals (all three Major Markets) from Lead through Approved stages disclosing the upfront payment Product and Technology licenses signed from 1/1/2009 through 7/15/2012 * Major Market Territories include ANY of the U.S., Europe, or Japan; Worldwide territory includes ALL of the US, EU, and Japan
14
Looking at the Major Strategic Alternatives

Option
Outright sale or Merger of Company
What it Means
Sell full control of company for value today
Pros
Simple and clean transaction of known value No continued exposure to clinical and commercial risk
Cons
Potential value of lead asset and pipeline likely to be heavily discounted for clinical and commercial risk Lead asset likely to dominate valuation Continued exposure to clinical and commercial risk Exposure to risk of buyer change in strategy (no chance to take back products) Administrative complexity and long tail on payments (but they can be monetized) Potential value of product likely to be heavily discounted for clinical and commercial risk
Structured Sale of Company
Sell control for a combination of upfront payment, milestones, and royalties or final buyout
Likely to be highest headline price and provided share of upside Milestones and royalties can be monetised monetized later Buyer undertakes commercialisation
Outright sale of lead asset and related compounds
Simple and clean transaction of known Sell full control of lead asset for value with no continued exposure to value today, distribute all or part of clinical and commercial risk of lead proceeds asset Retain pipeline for further development and future value Sell commercialization rights for combination of upfront and future payments, such as: Upfront Payment Clinical/Regulatory milestones Launch/Sales milestones Royalties
Structured sale of lead asset and related compounds through licensing or related deal
Opportunity to create incremental Need to continue management of value in retained pipeline using part of company and pipeline proceeds Maintain some control of development Complex to negotiate & administer and possibly greater future upside Continued exposure to clinical and Opportunity to create incremental execution risks value in retained pipeline using part of Long tail on proceeds (though these proceeds may be monetizable later) Mechanism to recover lead asset in Need to manage company and pipeline event of discontinuation 15
Access to Capital
16
Capital Raising: Reflecting on the Sources

Investor participation Venture Capital General and Limited Partner constraints Venture debt High net worth / family offices Public markets IPO sentiment Follow on rounds Royalty monetization On the rise Government and foundations Sources of non-dilutive capital via grants Licensing and asset sale Becoming more structured, and arguably harder to complete; option based, backended Addressing the competing needs for risk mitigation and portfolio augmentation
17
Life Science VC Deal Volume by Subsector

1H2012 vs. 2009-2011
120 100 80 60 40 20 0 Tx Dev/Del Dx/PM
2009 2010 2011 1H 2012
TP
Data Source: ZephyrBiotech LLC
18
Life Science VC Investment by Subsector (MUSD)

1H2012 vs. 2009-2011
2500.00
2000.00
1500.00 1000.00 500.00 0.00 Tx Dev/Del Dx/PM
2009 2010 2011 1H 2012
TP
Data Source: ZephyrBiotech LLC
19
IPOs
October IPOs 20% above their IPO prices KYTHERA Biopharmaceuticals lntercept Pharmaceuticals
$900 $800 $700 $600 $500 $400 $300 $200
$61M
$100 $-
$57M
$60M
Average
n=13
n=11
n=17
2010
2011
2012
20
Regional Transactions by Design vs. Default
21
Regional by Design Evaluating the Pros and Cons

Source of Non-dilutive financing Upfront payments >> extends runway Clinical trial support >> offsets expenses R&D clinical insight and KOL access May reduce technical risk and augment clinical profile Validation of regional market opportunity provides indicative guidance for downstream US / EU deals Enhances ability to raise non-dilutive capital at potentially higher valuation (based on asset de-risking)
Pros
Reduces the size of future opportunity for larger strategic players Emerging Markets more relevant to total valuation
Cons
Reduced capacity to design and execute clinical trial may not be relevant to US regulators and market Clinical progress in regional trials may disappoint Inability to achieve regional milestones may threaten overall program viability
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Regional by Default Considering the Transaction Profile

Company misses pre-specified primary but with positive trends Major Pharma players fall away as a result Risk-averse behavior come back to us when you have unambiguously positive data Challenging to re-calibrate value before Big Pharma following release of sub-optimal data
Situation
Typical deal architecture
Modest upfront < $5M Shared development costs of Regional RCT Regional rights ceded Percentage of global rights ceded
Outcomes
Regional Co. gains negotiated percentage of global net sales (royalty obligation) Regional trial unlikely to satisfy global regulatory requirements Global players may not grant much credence to regional player and associated clinical trial Financial players may identify partial validation
23
Regional by Default Case Studies

Case Study #1
Situation: European company. Phase II Ophthalmology asset. Challenge: Phase II clinical data equivocal. Missed primary outcome. Hit some secondary outcomes. Solution: AsiaCo generics focused ophthalmology company seeking backward integration. Manufacturing capacity available. Regional growth ambitions. Action: Regional transaction design. Regional developmental and commercial rights. 50% cost of regional Phase II. Modest upfront. Clinical, regulatory and commercial milestones. Manufacturing supply agreement for region. Percentage of global rights to AsiaCo.
Case Study #2
Situation: US company. Phase II Respiratory asset. Challenge: Phase II clinical data negative. Missed primary and secondary outcomes. Solution: EuroCo generics / branded focused respiratory. Regional and international growth objectives. Action: Regional transaction design. EU developmental and commercial rights. Cost of EMA accepted Phase II RCT covered. Modest upfront. M Clinical, regulatory and commercial milestones. Transfer price agreement on clinical batch and commercial supply. Percentage of global rights to EuroCo.
24
Case Study Small biopharma with single Phase I asset
25
Case Study Background

Platform target based company (proprietary receptor-based bioassays; several lead candidates including monoclonal and small molecules) Strategy to leverage single Phase I (breast cancer) small molecule for follow-on molecules and therapeutic areas (prostate cancer and osteoporosis) Deliverables: Identify relevant partners Identify comparable deal precedents and deal models Analyze by development stage key deal terms, financials, and structures
26
Selection Criteria for Benchmarking

Category Technologies Deal Structure Partners Clinical Phase Survival Rates Therapeutic Areas Stage at Deal Signing Territory Selection Criteria All technologies License; Broad collaboration; Co-development Pharmaceutical company; biotechnology company Oncology Cancer Lead molecule; Preclinical; Phase I; Phase II Worldwide
27
Benchmarking Deal Characteristics

Analyze current asset to 161 recent cancer deals with respect to: Deal characteristics that differentiate the range of upfronts ($100k$150M) Stage at signing Clinical survival rates
28
Deals Comparables
Therapeutic Area Total Deals (n) No. Deals Disclosing Upfront Payment (n) Cancer 161 35 (%) 22% Aggregate Disclosed Total Upfront Payments ($M) $681.7M Range Mean Median Upfront Upfront Payment Payment ($M) ($M)
$100k-$150M $19.5M
$8.5M
Selected 10 deals for Phase I vs. Phase II licensing Phase I: $ 26M Phase II: $ 332M Identified deal opportunities with ranked competing criteria Marketed: 3 Filed: 1 Phase III: 9 Phase II: 36 Phase I: 20
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Narrow Selection Criteria for Comparables

Category Technologies Deal Structure Clinical Phase Survival Rates Partners Competing drugs Therapeutic Areas Endpoint with contingencies Territory
Selection Criteria Small molecules; monoclonal Co-development Breast cancer Biotechnology company Phase I and II sorted by target type in disease indication Narrow focus on target type and disease indication Phase II Worldwide with regional exclusions
30
Narrow Comparables Clinical Phase Survival Rates

Comparables with narrow focus on target type and disease indication: breast cancer and receptor types = 30% survival (vs. 11 for non-receptor)
31
Case Study Outcome

Supported by metrics, decided to not license at Phase I Stage at signing Comparable deals Competing drugs Probability of technical success Successful at obtaining funding for Phase II development Have good deal metrics to support strategy for follow on therapeutic areas and lead molecules
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Summary
Current financial environment demands a proactive partnering strategy supported by strong deal analytics Key initial step is determining financing options (IPOs, licensing, M&A, options) Benchmark potential deals against several models No two deals are identical Consider a regional by design transaction strategy
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Deloitte | Torreya Licensing Insight

Deloitte | Torreya Licensing Insight combines the analytical power of Deloitte Recap with the demonstrated experience of Torreya Partners in the setting of biopharmaceutical transactions advisory and financing
Top tier investment banking and pharma / biotech executives Intimate understanding of pharma / biotech transaction processes Extensive track record and biopharma relationships Reputation as thoughtful, objective and experienced professionals which fosters receptive audience within pharma
Deloitte Recaps premier international biopharmaceutical transactions database Experienced team of biopharma consultants and Deloitte | Torreya advisors Licensing Insight The power of Deloitte with wrap around services in market research and financial structuring
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Contact Deloitte Recap for More Information

Stay tuned for details on the next webinar Module 2: Determining the Optimal Partnering Package Subscriptions and Consulting +1 855 381 4748 | recap@deloitte.com | www.recap.com
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This presentation contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this presentation, rendering business, financial, investment, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this presentation.
About Deloitte As used in this document, Deloitte means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Deal Builder, Valuation Analyzer, Development Optimizer, Recap Scout, and Recap IQ Series by Deloitte are trademarks of Deloitte Recap LLC.
Insight into Action www.recap.com Copyright 2012| Deloitte Development LLC. All rights reserved. Copyright Deloitte Development LLC. All rights reserved. Member of2012 Deloitte Touche Tohmatsu Limited
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Deloitte Recap Webinar Series

Licensing Insights: Generating Better Deals, Faster

November 6, 2012 Deloitte Recap LLC www.recap.com

Module 1: Determining the Optimal Time to Partner

Module 1: Determining the Optimal Time to Partner

Business Development Strategies

Licensing Process Matching Strategy to Context

Model construction based on NPV Analysis Asset benchmarking

Deal structures Creating term sheets

IP, contracts, Ownership structure, Liabilities/ assets; Business plan

Module 2: Determining the Optimal Partnering Package

Module 3: Determining the Optimal Partner

The third webinar in the series will address Interested Parties

Module 4: Determining Asset Value

Upfront Payments vs. Clinical Risk

Upfront Payments Increase by Stage

Worldwide (All Major Markets) Median

Median Upfront ($M)

102% increase in median upfront at Phase II

Stage of Asset at Signing

Data Source: Deloitte Recap LLC

Clinical Attrition Rates Decrease by Stage

More than half of all indication pursuits will fail at Phase II

17% Approval Success Rate

Development Stage of Asset

Data Source: Deloitte Recap LLC

Phase II Attrition Rates by Therapeutic Area

Autoimmune/Inflammatory (n=106) 62%

Neuroscience (n=143) 60%

Infectious Disease (n=173) 51%

Upfront Payments Versus Risk

Worldwide (All Major Markets) Median

Median Upfront Median Upfront ($M)

25% increase in upfront payment

102% increase in upfront payment

Phase I hurdle (safety) cleared 62% Phase II risk ahead

$17.0 $2.0 $7.3

Stage of Asset at Signing

Data Source: Deloitte Recap LLC

Looking at the Major Strategic Alternatives

Structured Sale of Company

Outright sale of lead asset and related compounds

Capital Raising: Reflecting on the Sources

Life Science VC Deal Volume by Subsector

2009 2010 2011 1H 2012

Data Source: ZephyrBiotech LLC

Life Science VC Investment by Subsector (MUSD)

1500.00 1000.00 500.00 0.00 Tx Dev/Del Dx/PM

2009 2010 2011 1H 2012

Data Source: ZephyrBiotech LLC

Regional Transactions by Design vs. Default

Regional by Design Evaluating the Pros and Cons

Regional by Default Considering the Transaction Profile

Typical deal architecture

Regional by Default Case Studies

Case Study Small biopharma with single Phase I asset

Case Study Background

Selection Criteria for Benchmarking

Benchmarking Deal Characteristics

Data Source: Deloitte Recap LLC

Narrow Selection Criteria for Comparables

Narrow Comparables Clinical Phase Survival Rates