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Out-licensing in the Nordics: maximizing company value

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There is a constant aim of raising capital and propelling company growth within the nature of the biotech industry. When the timing is right, out-licensing a drug candidate might be the right choice instead of seeking to raise capital from the market and, for most, even an inevitable step in the company journey. We would even go so far to say that it may even be the “Nordic model”, where the best way to achieve the largest therapeutic potential and maximize the company value is likely to out-licensing a candidate to a global pharmaceutical company. We have had plenty of exposure to different types and stages of out-licensing deals throughout the years, so we put together a brief primer on the essentials to know about out-licensing endeavors within the biotech industry.

Set purpose and objective

Finding the right partner to out-license a candidate to can be a long process, during which many different factors could cause the process to halt. A company looking to out-license would be wise to have a thoroughly planned strategy for identifying potential partners. This will save time for both parties and improve the chances of identifying the best potential partner. Thorough research and a targeted approach are the key pillars here. This means that a company seeking to out-license a drug candidate needs to set a purpose and objective before going full force, while also having an open mind and being opportunistic.

Asset stage often sets the structure 

The structure of the out-licensing deal will mainly depend on the development stage of the out-licensing company as well as company resources. The two relevant types of agreements for a smaller biotech firm to seek are licensing or acquisition. If a company would like to just out-license their candidate there will still be shared work, capital costs as well as some control over the candidate development. In the case of an acquisition, the out-licensing company will no longer be involved in development, be relieved of all development costs, and lose control of candidate development.

These two agreement structures are the two extremes of the spectrum, meaning deal structures can land somewhere in between. For example, agreements can also be structured differently in regard to certain geographies or indications.

Is there an optimal timing to out-license?

Optimally timing an out-licensing process is an essential factor that will contribute to a successful outcome. Generally speaking, out-licensing a candidate can result in a variety of deal structures depending on the development stage of the candidate, or simply put, the timing. The different potential deal structures are primarily tied to the development risk that follows after the candidate is in-licensed.

If a candidate is out-licensed at an earlier development stage, a low upfront payment is to be expected. This could, however, be outweighed by high potential milestone payments and royalties. Essentially, the company out-licensing the drug candidate needs to determine if they think it is beneficial for them to share the development risk at that time. An additional benefit to out-licensing a candidate at an earlier stage, despite a relatively low upfront payment, is a positive response from investors who might then see the successful out-licensing as a validation of the company’s core technology, making them more willing to continue investing in other development candidates in the company’s portfolio. There is of course also the other side to this, if a license deal is terminated ahead of time or the drug candidate is returned, negative effects will likely be seen from investors no matter the explanations.

If a candidate is out-licensed at a later development stage, a higher upfront payment is to be expected. A candidate that is in later stages carries less risk than one in an earlier stage, leading to a substantially larger net present value. However, a company that decides to wait until a later stage to out-license their candidate needs to be prepared to keep most of the development risk in-house until then.

The process of choosing a license partner is described to be similar to that of marriage –
you are stuck with the partner likely for years to come, so you better choose right.

Who would be a good partner?

Several times we have heard clients describe the process of choosing a license partner as being similar to that of marriage. You are stuck with the partner likely for years to come, so you better choose right and while you can compromise on certain things, there are some things that are deal-breakers. So, what should be considered ahead of time?

One of the key questions when evaluating a potential partner, especially when milestones and royalties are involved, is: Will the partner be able to successfully develop and commercialize the candidate? While the question is obvious, the answer is less so. A few key factors to look at when trying to answer this question are the therapeutic focus and technology expertise of the potential partners. Analyzing the pipeline of a potential partner can help with this process. For example, did a potential partner recently fail a Phase II trial within a relevant indication? Will your drug candidate be able to fill the gap that was left after the potential partner’s candidate produced inadequate results?

Nurturing relationships with care

When approaching licensing activities, a focused business development team needs to be prepared and provided with the right resources and expertise required to drive the process forward. It is a precarious relationship that needs to be nurtured, often during several months to sometimes years.

Sealing the deal 

No one said it would be easy, but history tells us that licensing deals are more than achievable with the top 20 partnership and M&A deals of 2019 reaching a value of around $300 billion. Better yet, the deal landscape has shown no signs of slowing down.

MSC Nordics has the experience required to bolster companies seeking to out-license their candidate, whether it be through valuation and deal structuring or partnership identification and outreach. If your company is considering if it is time to out-license a candidate, or even if the decision has already been made, don’t hesitate to get in touch with us.

Dos and don’ts with VC interactions

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Venture capitalists (VCs) invested $14 billion in biopharma startups in 2019, helping these companies survive and grow past the cash draining development phases. Are you out there looking to get a piece of the 2020 funding cake? We’re here to help! MSC Associate Stephanie Mattson, with experience from one of Sweden’s largest life science funds, shares the dos and don’ts of interacting with VCs – and it might make or break your deal. This guide takes you from the initial choice of which VC firm to contact all the way to taking the next step when you have the investor on the hook.

Firstly, use your time wisely – don’t spread your efforts too thin

Entertaining a VC can be time-consuming. If they find your company interesting, they will have a lot of questions, which requires you to put in a lot of work to prepare materials and answers questions. A VC will lose interest if you don’t respond quickly enough or if your responses are incomplete or unprofessional. Hence, the take-home message to startups is not to engage with too many VCs at once. You want to have time to woo the investor.

All VCs are not the same, find the ones with an appetite for your business

Every VC firm has a sweet spot determined by the type of companies or technologies they invest in; which development phase the company is in, the size of the initial investment, the size of the total commitment needed and the level of engagement in the company (taking a Board seat, operational work, etc.). As a company looking for funding, you should aim to be within that sweet spot, and if you’re not – don’t waste your time. Turn your attention instead and contact a VC that is a better fit with where you are and what you need. You can usually find this information on the VC’s home page, but don’t forget also to analyze what deals they have made in the past to understand their preferences.

Extra tip: If you’re a public company, you should investigate if the VC invests in public companies at all.

You should also ask yourself if the VC is within your sweet spot. Before you contact VCs, have a clear understanding of what type of commitment you’re looking for. What does my company need in the long-term? What kind of help do I need from my investor (contacts, expertise etc.)? The investor will probably ask you what you expect of them fairly early in the process and expect you to have a clear answer to this question. An answer that only revolves around an amount of money to an investor that usually takes an active role in companies will lead them to think that you won’t use their resources optimally.

Speaking to the right person increases your chances of success

Once you’ve identified the VC firms of interest, it’s time to make contact; but your research shouldn’t end here. There’s probably someone at the company that will give you better odds to score a meeting – and you’ll want to know who that someone is. Study which areas each investment manager specializes in, what they usually talk about in different contexts (LinkedIn, summits etc.) and where their investment focus lies. Another aspect that might be equally important is timing. If an investor is new to the firm, they’re probably very focused on building their portfolio. This means that they’re probably taking more meetings than other investors at the firm. If you’re lucky, the newly onboarded employee is also specialized in your area.

VCs love warm introductions. Try to find a common contact in their network. Do you perhaps know the founder or Board member of a company they’ve invested in previously?

Gaining trust and making a lasting first impression – skip the NDA

Once the investor has agreed to take a meeting, you need to make the right first impression. Remember that the investor is contemplating getting into a long-term engagement with you, your team and, your company. Make sure to show them that you are trustworthy and easy to collaborate with. To obtain trust, you should be honest and straightforward in your communication. Investors may reject investment opportunities because they feel the entrepreneur is being evasive when answering questions or that they’re hiding something.

Prior to the first meeting, you may feel the need to ask the VC to sign an NDA. Just be aware that most VCs won’t agree to this. From their perspective, signing an NDA is a liability risk and something that may hinder them from making the best decisions for their investment portfolio as a whole. VCs often meet companies working with similar business ideas and may have already invested in a company that is similar to yours. Therefore, signing an NDA before knowing anything about your technology or growth plans may impede their current business and ongoing discussions. The take-home message is that you shouldn’t bring it up because you’ll probably lose that discussion.  You can, of course, avoid speaking about your technology’s most sensitive aspects until after the first meetings.

Time to pitch – keep it simple and be ready for questions!

The first time you sit down with the investor to pitch is precious time that any entrepreneur wants to maximize. However, this often results in an information-packed pitch that takes a long time to walk through. This is a classic mistake. Many investors will hijack your presentation and bombard you with questions. It might be because they are bored and want to have more of a dialogue, but most often it’s because they’re interested and want to know more – so see it as an opportunity to engage and show off the parts of your tech or business case that stirs their interest.

Our best advice is to have a short, direct presentation and to know your presentation well enough to be able to present it in a random order. And last but not least, be well aware that your reaction to questions and interruptions during the pitch can make or break your deal. Investors want to see a flexible and passionate entrepreneur, so do your best to accommodate the investors questions.

Curious about what to bring up in your pitch deck? Check out our previous post on how to build the most attractive investor pitch deck here.