At the June 15 Johnson & Johnson Innovation, JLABS seminar titled, ‘Lessons in Herding Cats,’ Lesley Stolz, Ph.D., gave Cove attendees a crash course in the basics of business development. Stolz, head of JLABS, California, shared pointers on how to manage the chaos of business development, technology valuation, deal-making steps, negotiation, and contracting.
According to Stolz, the role of the business developer is multifaceted, delving into both the science and business side of a company. At Johnson & Johnson Innovation, the mission is to generate options and long term value through financing, non-dilutive capital, technology in-licensing, and research out-licensing as well as enacting commercial agreements, mergers and acquisitions. She commented that in a small company, business developers can perform multiple functions including developing strategy, scouting partnerships, and managing the diligence process, negotiations, and deals.
Setting goals: Stolz advised research entrepreneurs to be clear when communicating their goals for business development. In conducting diligence on intellectual property, set safe boundaries for exchanging information on their IP. For example, when a potential licensor wants to reproduce your laboratory results, “It is okay if they are repeating something you have already done,” Stolz says. “If they do something new, then be very careful. If you are confident this will work, don’t let them own the data. It is your data and your molecule. They can have the data if they license it.”
Due diligence: The ability to exchange due diligence information is important for the value of the deal and for the buyer to know what they are buying. Information is exchanged using data rooms, secure cloud-based repositories for data, experiments, and financial information that enable controlled access.
According to Stolz, an innovator who is developing a technology from a university needs to understand how to set up the licensing agreement, including milestones, royalties, and patent expiration. She explained a few more concepts:
Term sheet: If due diligence does not identify any deal killers, the next step is to create a three to four page non-binding term sheet. It will be important for the seller of the technology to identify the terms and budgets. Companies like Johnson & Johnson have rigorous approval processes for term sheets as well as signing the deal. Negotiation issues can include: licensing, retained rights, payments, responsibilities of the various parties to the deal, manufacturing and supply, IP inventorship, prosecution and enforcement, dispute resolution, and termination. According to Stolz, if you have a single product, you will not be keeping much IP, but if you have a platform technology, you need to craft the licensing agreement very carefully thinking about how you will enforce your IP.
Payment: Consider how payment will be negotiated. There are a lot of ways to spread out deals over their lifetimes. “If you need five million dollars, that may require you to give up on a milestone that is further down the road to deliver value to a partner,” Stolz says. “What is going to be the dispute resolution process?”
Valuation: Formulas can be based on factors including scarcity, any portfolio synergies or gaps, and whether you are a technology leader. “Value is in the wallet of the payer,” Stolz says. “How badly do they need it? How pretty is the technology? You are going to get a bigger piece of the compound if it is first-in-class, best-in-class, and you have already put a lot of money into de-risking it.”
Conducting discounted cash flow analyses allow you to defend the value of your technology and start negotiations on a solid basis. In the early days when you are bleeding money, the risk is high. As risk lessens, the value goes up. “The other thing to keep in mind is that nobody is ever going to share their model with you, but they will share their assumptions with you,” says Stolz, noting that an up-front payment represents access to your technology and exclusivity, while funding FTE salaries, benefits, and overhead.
Milestones: Setting milestones can depend on the level of risk reduction and size, ranging based on the size of your market and the rate of success for that disease. For example, antibiotics have a high rate of successfully getting into the clinic, while cancer drugs do not.
Negotiation: Key negotiation principles include openly discussing the needs and expectations of your organization, getting the perspective of the other party, establishing scope and key success factors that will guide project decision-making and writing down both the framework and the intent of the desired relationship into the agreement. According to Stolz, inherently negotiation is conflict. “Know your walk-away point,” Stolz adds. “As you work through this process you will never lose sight of what that floor is.”
Listening is important: “Truly learning how to listen is a good skill to have,” Stolz says. “Get someone on your negotiating team to just listen. People will telegraph how to solve a problem. Make sure you understand how you are going to communicate internally.” She advised focusing on body language and listening skills: “When negotiating, consciously open yourself up,” Stolz says. “Remember that the body speaks.” She advised planning ahead, listen, take notes, listen, repeat things that had been agreed upon, listen, and never postpone resolving issues until the legal drafting stage. “Let counsel advise you, but don’t let them make your business decisions,” Stolz cautions.
The contract: According to Stolz, the person who owns the technology should direct the contract. Contracts are long and tedious, but their language protects you. Read crucial parts of the contract including the sections on intellectual property prosecution, representation and warranties, Indemnities, and termination clauses. “You should identify deal-breakers immediately,” Stolz says. “There are a number of things you will want to leave to a lawyer, but every single part of that contract is a business decision, not a legal decision.” Key contractual provisions include non-exclusivity, royalties, and termination. “Remember, the contract is just the beginning,” Stolz says. “That is just to get married.”