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Utilizing a measured approach can increase the probability for identifying search criteria that fulfill a company’s strategy.
Licensing plays an increasingly important role in the business model of pharmaceutical and biotechnology companies. In 2004, 26.1 percent of the top 15 pharmaceutical companies' sales were derived from in-licensed drugs. Large pharmaceutical companies that in the past were proud of their "not invented here" mentality, have subsequently developed impressive and effective licensing organizations. However, while the large financial burden of maintaining an effective in-licensing process remains a luxury of big pharma, more and more biotechnology and specialty pharma companies are realizing they must match competencies to stay competitive and achieve the maximal market valuation possible.
In a survey conducted by 2Value of 261 CEOs and licensing executives of biopharma companies, 84 percent acknowledged they are challenged by one or more of the following: 1) ability to identify quality candidates, 2) competition for attractive compounds, 3) overexposure of US-based licensing opportunities that drive up headline values.
The art of licensing deal making is a craft developed over time and experience. Therefore, it is no surprise that many emerging companies are facing challenges while trying to identify in-licensing opportunities that will simultaneously serve as growth engines and maximize shareholder value.
The following is a description of vital elements that are essential for executing a successful in-licensing strategy.
The importance of setting realistic search criteria cannot be understated. Generally unrealistic expectations involve the perception of a large market opportunity, low developmental risk, and the unanticipated constraints of limited capital to establish an attractive licensing arrangement. Having unfocused (too wide or too narrow) criteria makes the search inefficient and very expensive considering the time and opportunity cost (i.e., spending internal resources that can be better utilized if a proper strategic evaluation process has occurred earlier).
Companies should approach a licensing strategy process by reviewing the licensing landscape (including an accurate analysis of unmet medical needs), correlating the target market with investment trends, and clearly defining their ability to raise capital around the licensed assets. Utilizing a measured approach can increase the probability for identifying search criteria that fulfill a company's strategy. Companies stating that they are "opportunistic" regarding licensing activities find themselves floundering with an inefficient and resource consuming process resulting in few successful licensing candidates.
. To ensure that relevant opportunities will be properly reviewed by an internal evaluation team, a hierarchical review process is usually established. The high costs of hiring an experienced business development (BD) team forces many companies to remain understaffed. The 2Value survey found on average 2.6 staff members dedicated to BD functions, which can limit networking efficiencies and analytical processes, and dramatically decrease the ability to find attractive and affordable licensing opportunities.
Value-added Licensing Deals - Amgen's Acquisition of Tularik
The internal team should define a process to identify, review, and evaluate a licensing opportunity within a certain timeframe and to recommend further action to management. Proactive efforts to source licensing opportunities include, but are not limited to: reviewing scientific journals; attending scientific, financial and partnering conferences; and conducting a creative survey of the target market(s) for niched opportunities.
External Resources. The use of a professional BD company or investment bank can dramatically expedite and increase productive deal flow. Considering the fierce competition for the few attractive opportunities available, having introductions to relevant opportunities ahead of the competition can become a critical advantage.
CompanyWebsite and Collateral
Publish in-licensing/partnering search criteria and contact information of staff members responsible for new opportunities on the company's website. Spread the word about the search among employees and create a process to capture ideas stemming from the employees' industry network. Scientific expertise frequently overlaps and the dissemination of new findings is often discussed among scientists with little regard for the proprietary nature of potent avenues to new products.
Commercial Databases. While 45 percent of the survey participants acknowledged that their companies use one or more subscription-based databases to identify in-licensing opportunities (e.g., PharmaProject, IDdb3, PharmaLive., etc.), most mentioned they encountered out-dated information that led to spending critical time on unnecessary due diligence. Instead they found the tools useful primarily for competitive intelligence, while remaining much less efficacious for the identification of viable licensing opportunities.
A Case of Strategic Divestiture Gilead & Eyetech
To effectively review licensing opportunities originating from the sourcing process described earlier, one must establish an effective review and elimination process. The sooner a company can eliminate an irrelevant opportunity, the better it is positioned to focus its resources on performing due diligence on the relevant ones. A company with a well-structured review process and well-defined search criteria can achieve this task more efficiently. The challenge begins when the criteria are poorly defined and subjective arguments influence decision-making areas that should remain fact driven. Moreover, the lack of a structured screening process and an inefficient tracking process cause companies to overlook relevant opportunities, perform duplicate reviews of opportunities arriving from several channels, and an increased burden on internal resources.
A review is usually performed more effectively by a multifunctional team where each member contributes his own expertise and each input can be looked over by at least one other person in the group. The following review steps of non-confidential information should lead to an educated go/no-go decision and a confidental disclosure agreement with the licensor for further due diligence in attractive in-licensing opportunities.
Licensing has become a crucial part of most biotech, specialty pharma, and pharmaceutical business models. Nonetheless, most executives and licensing professionals are far from satisfied with their own ability to identify, evaluate, and execute a licensing deal in a timely fashion.
To remain competitive, companies must do one of two things. They can commit to a larger internal licensing infrastructure that can methodically and proactively search for licensing opportunities. Alternatively, they can elect to outsource the screening and identification activities to professional BD providers who can expedite the in-licensing process and provide high-quality deal flow of relevant licensing opportunities.
Effective outsourcing permits management to remain focused on the company's core activities. This strategy provides time for reviewing relevant opportunities, coordinating the alignment of internal resources to analyze licensing opportunities while conducting due diligence, and eventually structuring licensing deals that enhance shareholder value.
Recent examples of the interplay between the collective variables producing a successful licensing strategy can perhaps best be defined using some recent transactions. The examples provided here (sidebars) identify important aspects of licensing deal structures. The value of a BD advisor with a real-time perspective on market dynamics can create even greater capture of asset values when structuring licensing transactions.
Ranan Lachman is a principal, and Marc Samet, Ph.D., an associate principal, with 2Value, 212.202.5563, firstname.lastname@example.org, email@example.com.