Avoiding the Train Wreck

Get the information you need while building a long-term relationship.
Oct 01, 2004

When biotechnology CEOs get together, the conversation quickly turns to "working with Big Pharma." Few topics are discussed as passionately as surviving the due diligence process. Due diligence occurs when a large firm seeks to license a biotech company's compound. The process allows the licensor to verify the biotech's claims, assess the technology's value, understand third-party rights, and gain an accurate understanding of key issues that affect Big Pharma's ability to commercialize the compound. The biotech must conduct due diligence of its own to assess the commercialization resources of the large firm and choose the best possible partner.

If the process goes poorly, it can be a train wreck. Teams of large pharma managers collect irrelevant information, failing to ask important questions. Small firms send managers to potential partners and only hear what they already know. The longer the process drags on, the worse things get. The goal of both sides is to conduct due diligence in the most efficient way possible while collecting the information needed to make a "go or no-go" decision.

This article describes the "due diligence framework," a rigorous, structured approach for planning and implementing a successful due diligence process. The framework includes tools, metrics, and management techniques that help focus both companies' attention on technology development, competitive risks, and commercialization potential.

Building a long-term relationship between a pharmaceutical company and a biotech firm is an explicit part of the framework. A limited number of "best-in-class" biotech companies engage in innovative programs directly related to a large pharma's areas of therapeutic interest. These programs will produce a continuing flow of innovation, not just one compound. Big Pharma needs preferential access to this flow of compounds, not just the immediate target molecule.

With this in mind, the due diligence framework has four goals:

  • Prepare both firms for the process by accurately communicating events, timelines, resource requirements, and outcomes.
  • Accurately evaluate the immediate opportunity.
  • Make the process as valuable to the licensor as it is to the licensee.
  • Allow the pharma company to gain preferential access to the biotech's portfolio of compounds by allowing it to build a strong relationship with the target company.

The due diligence framework is an efficient process, but efficient does not mean quick and easy. There are no shortcuts. Efficiency takes the form of minimizing resource commitments and disruptions to ongoing programs while learning what each side needs to know. In other words, the framework converts normal due diligence root canal into a painless filling. The process has six steps:

1. determining what you need to know

2. assembling the due diligence team

3. preparing the partner for the due diligence process

4. managing interactions between firms

5. conducting due diligence on intellectual assets

6. using the collected information to create value for both firms.

Determining What You "Need" to Know Everything begins with an accurate understanding of what you need to know. Before starting the formal due diligence process, managers at Roche, for example, evaluate the opportunity along the entire commercialization pathway, from research to sales and marketing. In particular, they assess four dimensions:

lorem ipsum