Business Development for the Biotechnology and Pharmaceutical Industry

This book has come about through the creation of a course in pharmaceutical 
business development. In 2004 I met with Luc de Lange who was establishing 
CELforPharma – a new management training firm where he is the CEO. Luc 
was seeking new courses for the new company. He had identified that no 
specific courses were being offered for the industry in the area of business 
development and asked if I could develop such a course for him. The result 
is a 2-day course which covers largely the same content as this book and 
has evolved since the initial versions to be a high-level overview of business 
development with special emphasis on the needs of the pharmaceutical and 
biotechnology industry. In developing that course I received a great deal of 
help from Luc in refining the structure and delivery of the messages. Over the 
last 3 years we have focused on the issues that the delegates have identified as 
the most interesting and relevant to them, and these are reflected in this book. 
Therefore, rather than aempt to explain every nuance of the techniques and 
tools required to develop businesses in the industry, I have tried to provide 
the same kind of ‘illustrated tour’ of the structure of a licensing transaction 
with an occasional detour into mergers and acquisitions or financing. The 
course now also runs twice a year in China in association with David Xue of 
Pharmaguys Ltd, I have since developed an expanded 4-day version of 
the course which is presented with a faculty of colleagues from the industry as 
the ‘European Course on BioBusiness Development’ (ECBD) and is run under 
the auspices of the University of Basel as an elective module in the Masters 
in Advanced Studies in Drug Development Sciences offered by the university 
under Professor Fritz Buhler. 
Business development in the pharmaceutical industry is a topic which 
is too broad and diffuse to try and encapsulate comprehensively in a single 
volume and I cannot hope to provide a description for more than a fraction of 
the possible variations in deal structure and techniques used. So, drawing on 
the continuing popularity of the pharma business development course, I offer 
some of the experiences I have had and stories I have heard which can act as a 
broad checklist for those trying to bring their own deals to a successful close. 
I’m sure I will have missed many items and issues but I hope the book will act 
as a reasonable guide to help colleagues plan their business development deals 
and other transactions and avoid some of the worst pitfalls while en route. 

Defining business development 
What is ‘business development’? This is usually the first question I have 
to answer whenever I’m asked what I do for a living by people outside the 
pharmaceutical industry. The answers I try to give are oen tailored to the 
audience and what they are likely to quickly understand from their own 
experience. However, as few people have any idea that such a role exists 
beyond some hazy idea of marketing they usually smile politely and suddenly 
remember there is someone on the other side of the room to whom they must 
say hello immediately. So a definition of business development, at least as I 
have seen it performed since it comes in many different guises, will be useful. I 
define it as ‘any activity that alters the status quo of the business’. This includes 
activities such as: 
adding for growth 
subtracting for profit 
business process improvement 
competitive awareness and advantage. 
Planning is a central activity to business development because, as a friend 
once told me, ‘There is no worse combination than great tactics and a lousy 
strategy – you just make things worse faster.’ In order to plan well, the business 
developer will need to have or obtain a number of skills and resources and 
these will be the subject of later chapters. However, a base set of skills for the 
business developer include being well organized, having a good breadth of 
knowledge, imagination, being good at analysis in different forms and having 
good communications skills, particularly listening and interpretation. Good 
organization means not just being able to collect information but to collate it, 
recall it and relate it. I have had the advantage of having worked briefly in IT 
with database designers and seen how the discipline of having a process for 
each of these activities creates a systematic approach. These processes can be 
made into a computer program. Addressing the information needs of planning 
in a systematic way brings organization to the planner and helps in structuring 
their communications to their own organization and to their counterparties in 
any negotiations. 
Imagination is required because, while the pharmaceutical industry is 
at the pinnacle of scientific and technical innovation, bringing this science 
to market needs creativity and application. Business developers must look 
beyond the technology and into the future. This requires forecasting: seeing the 
combination of products or of processes or even of companies to create more 
value, which is needed to develop the business. 
Solid planning enables one to say ‘What if?’ about tomorrow. For instance, 
if our sales are €100 million today, what might happen next year if: a competitor 
doubles their promotion or brings a new product to market; perhaps a new 
surgical technique enters the market; two competitors merge and become more 
powerful or any number of other potential events? Many businesses have failed, 
or failed to thrive because they did not plan well, which means looking high 
and low and far and wide at their situation. It is business development that has 
this responsibility in both large and small companies. Companies that become 
bound up in their own technology and so see only their nearest competitors 
and local markets can limit not just their vision but their potential as well. 
Planning offers different choices; choices to add new products or companies 
to their portfolio for growth, or, if the company is mature, to sometimes 
‘subtract for profit’ by dividing products and spinning off activities which are 
diverting resources or diluting profit or growth. You may ask, ‘Why do large 
companies sell off product lines which are profitable?’ The reason is that just as 
gardeners cut off healthy branches which are growing in the wrong direction 
or making more wood and leaves than fruit, the company must be ‘trimmed’ to 
produce a beer result; particularly if the company is publicly traded. This may 
involve divesting itself of a slow-growing older brand to concentrate on new 
fast-growing products. The result will allow the chairman to point to rapid 
growth and a reduced reliance on products under threat of generic or other 
competition; shedding lower profit divisions or business units will also focus a 
company’s activities on what is the heart of its business. 
Close analysis of the company’s plans can also reveal deficiencies in business 
processes. When seeking reasons as to why next year’s growth cannot be more 
than ‘x’ per cent, or why last year’s growth was only ‘y’ per cent, it may be that 
there is insufficient manufacturing capacity or that the supply chain cannot 
perform fast enough. It may also be that orders can’t be processed or shipped 
fast enough or that orders are not being generated at sufficient speed. In each 
of these cases the business development function should be taking the lead in 
identifying the problem and proposing solutions. 
With the skills to collate and organize the data required for analysis and the 
imagination to see why the company is where it is, and what could be done to 
improve and increase the top and boom lines, the business developer has an 
important role in the strategy and direction of the company. There is a further 
major role for business development: as the company’s champion, someone 
who monitors competition. Business developers need to be very aware of threat 
and competition, sources of which include: 
internal constraints 
– inertia 
– distraction 
age and time 
direct competitors 
indirect competitors 
external constraints 
– external inertia 
– distraction 
new competitors 
task focusing. 
Competition comes in many forms. Perhaps the most galling is the 
negative effect of internal competition; the inertia in an organization which 
is best expressed by the old saying, ‘familiarity breeds contempt’. When parts 
of the organization sele for ‘the way we’ve always done it’, and ‘the easiest 
way’, then the company is not trying to improve its product. Many parts of an 
organization can become guilty of this and manufacturing and administration, 
two of the non-‘frontline’ groups, are particularly prone to it. Administrative 
functions tend to encourage inertia: the tedium of the task of shiing invoices 
and processing orders divorces staff from the reality of the market and the 
older a product is the less aention it gets in the organization. Years ago, as 
a product manager for older products (a good training ground for business 
development), I frequently had to go and unblock the system where stacks of 
orders or dockets or whatever had been sidelined because of some other priority 
or just through volume of work and ‘not enough resources’. This cry of not 
enough resources is a favourite among researchers and in manufacturing too. 
Manufacturing functions are oen diverted by minutiae since in any function 
there is a bewildering array of distracting events which are constantly present. 
Completion of each part of the project may be delayed because one thing or 
another has to be fixed first. Of course, all of these problems would be solved if 
only they had ‘more resources’. 
I list these distractions and sublimations as competition because like friction 
they slow down the business and so require the aention of the business 
developer every bit as much as does the competition that emanates from the 
outside world. 
Idleness and distraction are also powerful competitive forces in their 
own right because the variation in peoples’ underlying natures, before they 
are grouped together as customers, divides them into categories affecting the 
business development landscape (see Figure 1.1). 
In planning, the unseen market competitors are rarely featured as drivers in 
a market yet as barriers to entry they form sometimes insurmountable hurdles. 
Distraction, which is given negligible aention when compared to direct 
competition, occurs in the external market because people are overwhelmed 
with information. 
A company’s business developer needs to be aware of direct and indirect 
competition as actors and factors in terms of the market as well as in specific 
product challenges. It may be that the market opportunity can be treated 
by different modalities such as in the treatment of metabolic diseases like 
type II diabetes. Modifying someone’s diet so that they lose weight can be 
Ignorant Unconcerned Misinformed 
an effective way of controlling their diabetic symptoms and, while weightreducing 
foods may not seem to be a major component of the market, new 
functional foods are being developed which are likely to increase in the use 
of one modality over another, not involving a pharmaceutical product and 
could reduce the number of patients who should be considered as treatable 
in a market forecast. Similarly, cellular therapies that introduce new islet cells 
to the pancreas through various means are in the clinic and could also soon 
impact the direction of the market. 
In oncology the introduction and development of new products is quite 
intense. The number of patients available for treatment will be linked only to 
those entering therapy once those who have existing disease are treated. Many 
market models seen at investor conferences fail to take into account the fact 
that the available market for new biological therapies may be reduced because 
of advances in other areas such as radiotherapy or surgery. 
Even activities of the industry which are not intended as competition can 
have competitive effects. When a product for thrombolytic therapy was being 
evaluated it became apparent that the market was being severely depleted 
by the number of clinical trials being held for different agents, including the 
US National Institute of Health (NIH), which was aempting to establish 
the value of the therapeutic approach itself. Since there are only 1.5 million 
acute myocardial infarctions (heart aacks) per annum in the USA then, 
aer discounting those whose heart aack occurred too far away from major 
treatment centres to be useful, the number of new patients who would benefit 
from such therapy was some 250,000 per annum. Seven trials, each of which 
recruited 10–15,000 patients, were therefore leaving few patients to be treated 
on a paying basis. 
Business developers must therefore learn and apply their skills 
While they need to be aware of the situation of the company on the basis of 
historical data, they must also be capable of projecting future scenarios for the 
company in a multifaceted and multivariate environment with independently 
moving elements and competitors who will react to any change made by the 
company. Plans made to change the company must be flexible. 
The skills base for business development has three distinct areas: knowledge, 
analysis and communication. 
Knowledge of the research process does not mean that the business development 
person must be either a scientist or have performed this role. Some understanding 
of the biological basics of a drug’s action – and so the comparative strengths 
and weaknesses this could bring to a marketed product – is crucial however for 
evaluating or valuing a product for sale or for licensing. 
Manufacturing constraints and processes are a major component of a product’s 
value. Inherent complexity in a manufacturing process can become a protection 
if the know-how specific to a process is kept confidential or if it is patented. Such 
complexities might, however, be constraints and so a barrier to licensing the 
product. When considering a product, awareness of its ease of manufacturing 
is a vital component for the business developer. 
The supply chain, especially logistics management, is another component which 
affects product value and again is oen overlooked. Yet physical barriers have 
real effects on business. I was once le with no alternative but to fly 10 tonnes of 
an active ingredient from the US across the Atlantic to the Denmark because of 
inflexibility in supply chain. My product, a bulk-forming laxative, was selling 
well and exceeding forecasts, but the bulk-forming agent was being sourced 
from India by ship, then landed at New Orleans, taken by barge up to be milled 
in Chicago and shipped back down the Mississippi and then off again by ship 
to Denmark for irradiation before being transferred to the UK for packaging 
near Newcastle. To speed up the process when Newcastle began to run out of 
product for packaging we were forced either to airfreight to Denmark or to lose 
market share in the middle of the launch – we had no real choice. 
Development also has many different aspects, each with its own nomenclature 
for the practices and regulations involved. Indeed these regulations are a broad 
subject in themselves as they must define each step from pre-clinical work in 
lead identification then optimization, formulation and initial batch creation. 
Development moves on to follow a list of stages and clinical events such as 
initial trial design and toxicology, carcinogenicity studies, proof of concept 
in animals, entry into man, clinical trial design, statistics for the powering 
of studies, regulatory approval of trial design and processes approval for 
market. However, the overarching concern is the clinical trial design for it is 
this which will determine if the product can demonstrate the safety, efficacy 
and competitive advantage that will permit it to be marketed for the desired 
disease area, and under what conditions. Only if the design will produce the 
appropriate evidence can the value of the product to be fully exploited. 
Business development has a pivotal role in understanding the language and 
limitations of development methods and translating the needs of the market 
into a design which can produce data to satisfy the regulators. If the trial endpoints 
are too narrowly defined and produce results which are statistically 
inconclusive, a valuable product can be withheld from the market while 
extra trials are performed, or lost entirely if the costs are too high. Part of the 
knowledge required to create the product labelling therefore must come from 
a deep knowledge of the market as a sales medium. The process of marketing 
and selling medicines involves a structured series of events orchestrated in 
such a way as to introduce each of the players in the market to the new product, 
demonstrate its place in therapy, encourage first use and then, based on that 
experience, incorporate the product as a daily therapeutic choice. The market 
is made up of customers with needs and how to address those needs is the endpoint 
of the design of the clinical trials. Puing the right evidence in the hands 
of the salesperson is one of the most critical parts of developing a business. If 
the product and its message are not well understood and well designed then all 
other efforts will have been wasted. Products do not sell themselves. 
The business developer must understand the financing and financial 
consequences of all of the elements in the chain, which may start with the 
conception of a company as the means to commercialize academic research 
through to its establishment, product developments and commercialization in 
a market all the way to the distributions of profit and dividends to shareholders. 
Working with accountants, bankers, financiers, auditors and the rest requires 
the business developer to have insight and understanding of their methods. 
The business developer must understand the implications of one choice over 
another in the execution of licensing deals, the acquisition of companies, capital 
expenditure and taxation. 
All of this may seem a huge amount of knowledge to acquire. Part of the 
purpose of this book is to provide a route map to some of the as yet unexplored 
regions you will possibly visit in your next deal. 
Analytical skills 
The second area of skills required are analytical skills, I have broken these 
down into four basic areas: 
numerical skills 
heuristic skills. 
Process analysis looks at the logical sequence in a model where for instance the 
forecast for a product can be derived from a set of reasonably ‘hard’ data (such 
as epidemiological data sets, perhaps of disease incidence, prevalence or death 
rates). Knowing the numbers of patients suffering from a particular disease 
such as stress urinary incontinence (SUI), one can state various assumptions 
which are either fact-based or logical and from this produce a forecast (see 
Figure 1.2). 
Another way of approaching this is to read a counterparty’s licensing term 
sheet as if you had wrien it, looking not just for what it says but for what 
is omied, either deliberately or by mistake, and so work out your counterproposals 
to match their desires with your own. The term sheet is just a 
sketch of the final agreement and so there is much room for manoeuvre as the 
negotiation is planned. 

The general structure of a term sheet is shown in Figure 1.3. A bare minimum 
of detail is given, around which further terms will be added to suit the needs 
of the parties to the transaction. These additions form the texture and colour of 
the transaction and can reveal the intentions and motives of the parties when 
viewed in the context of the market. 
Therefore, it is a good idea to analyse the term sheet carefully, disentangling 
the motives of the other party from the legal statements. It should also be 
considered as an initial term sheet and an invitation to negotiate. Thus it is 
a valuable document. Appreciating the nuances in a term sheet oen stems 
from previous experience and so when a proposal arrives it is useful to have 
it reviewed by someone with the skills to see past the words on the page. The 
paern of the document can then be discerned. Paern analysis is partly an 
innate skill and partly one which improves with practice and experience. A 
recognizable theme may emerge in the data given in a data set, a product 
proposition or an external pitch, which can stimulate ideas or be used to form 
a plan. During a presentation you may get a feeling of deja vu and be able to 
apply previous experience or strategies to the case in hand. There can be a 
danger of stereotyping an idea as old or passe; at the same time, these echoes 
can help to reinforce the validity of a proposal. In investment circles the use of 
‘comparables’ (companies with a similar profile in age, size and market sector 
to the target company under consideration) is formalized to the point where a 
‘normalized’ or average model of companies in the area is used as the basis for 
estimating the value range of the company. Either of these approaches can be 
purposefully considered as a part of the analysis. 
Figure 1.3 Term sheet 
LICENSED PRODUCT: [Definition of licensed product] LICENSE: A nonexclusive, nontransferable, 
nondivisible license to make, use and sell LICENSED PRODUCT under ‘x’ Patent No. _________ with 
or without the right to sublicense customers. 
LICENSE ISSUE FEE: LICENSEE shall pay to LICENSOR a non refundable license issue fee in the 
amount of [€___________] Euros, to be paid by LICENSEE within ten (10) days [in installments] after 
execution of this agreement. 
ROYALTIES: (A) A royalty on all LICENSED PRODUCTS made, used, and sold by LICENSEE. (B) 
The royalty rate is [__%, with the right to sublicense; __% without the right to sublicense] of NET 
REVENUE (gross revenues less give-backs and returns) derived from the manufacture, use or sale of 
LICENSED PRODUCTS. (C) Royalty payments are due forty-five (45) days after March 31st, June 
30th, September 30th and December 31st during the term of the Agreement. 
PAST DAMAGES: Past damages to be calculated at the stated royalty rate. 
AUDIT: LICENSOR has audit rights through an independent public accounting firm selected by 
LICENSEE and approved by LICENSOR. 
LICENSOR pays for audit unless a discrepancy of more than 10% of the amount paid is found. 
MUTUAL RELEASE: The PARTIES release each other and their respective subsidiaries, vendors and 
customers with respect to performance by any of these entities, prior to the effective date of the License 
Agreement, of acts which if performed afterwards would be acts licensed under this Agreement. 
TERM: for the life of ‘x’ Patent No. _____________. 

A good example of the use of this kind of technique came up when I was 
trying to find ways to increase the sales of a newly launched product which, 
although it had great deal of positive clinical advantages over the market 
leader, was not selling as well as expected. All the market research data 
showed that the target group of physicians seemed keen to use the product. In 
searching for clues to the problem nothing superficially appeared to be going 
wrong and so I made a fine analysis of representative calling to see if a paern 
emerged. Firstly I grouped the representatives’ performances into high and 
low sales and then I compared the activity reports of the two groups to see if 
they were similar or different. The best-performing reps weren’t seeing more 
or different doctors to their colleagues, I found a paern in their behaviour 
which appeared to lead to beer sales. If the rep saw the pharmacist at the 
hospital, then the medical consultant, and then held a team meeting followed 
by another pharmacy call, hospital-led sales would start soon aer in the 
region. I had a chance to present my discovery to the field force at the national 
sales conference and suggested that everyone should try to copy this paern. 
Within 3 months our rate of growth trebled and the product really started to 
penetrate the market. Paerns in data, paerns in behaviour and paerns in 
markets are highly informative and you need to be aware of them and seek 
them out where possible. 
There is, at least in some quarters I think, an over-reliance on the significance 
of ‘making the numbers’ which is led by practices developed in the USA. This 
is particularly the case when the basis for an idea is weak yet there is a kind 
of clarity of thought brought about by reducing the analysis to mere numbers. 
Statistical techniques and calculation methods will be discussed later but for the 
business development function numbers have the power to penetrate raw data 
and to persuade (or dissuade) if used judiciously. While pernickety exactitude 
can be a major drawback, a good ‘feel’ for the numbers is an essential part of 
the business development skill set. 
Heuristic analysis is perhaps used more intuitively than consciously by most 
people. At its simplest it involves inferring: ‘if this is true and that is true, then 
perhaps …’ we might take this action or that, license a product or even acquire a 
company. Learning by doing feeds back into paern analysis and is informative 
to process analysis. By invoking an heuristic approach, sometimes called ‘blueskying’ 
or ‘brainstorming’, and, utilizing techniques for creative problem 
solving , it is possible to break out of a reductive analysis mode typically used 
in scientific circles which tends to produce only ‘right’ and ‘wrong’ answers. 
Although a reductionist approach is valuable in a great many circumstances, it 
can also seduce people into thinking that the alternatives are real and the only 
ones available. In business development as in life there is lile which is so black 
and white and which cannot be approached from other directions. 
Recently, I was advising a client who was faced with an ultimatum to either 
give up the shared intellectual property rights generated by their contract 
research, which was performed on behalf of their partner, or face non-payment 
of their invoices and so bankruptcy: a very stark choice. The resolution came 
through close examination of the legality of the threat and crucially, in the end, 
the place of arbitration chosen by the firm in the contract. The fact that the 
arbitration had to be conducted in a foreign language was very much to the 
research firm’s advantage, and the partner was forced to compromise. Careful 
analysis of what seemed like a ‘do it or die’ ultimatum had allowed my client 
to prevail. 
The minimum communication skills required for business development exceed 
those for many other specialities in business. Again I believe there are four 
main areas:

The linguistic ability of an individual is of paramount importance as it will be 
the basis for their reasoning. While employed as a teacher I had the experience 
of dealing with children whose language skills were poorly developed. Some 
of the characteristics they displayed can also be recognized in the population 
at large and even people of very high intelligence whose education has been 
highly specialized, for instance in science or finance, may possess only a limited 
vocabulary. It is the task of business development people to be able to bridge 
such gaps as and when they appear. 
Poor linguistic ability causes particular problems where there are language 
differences between parties. Even the use of British English with an American- 
English counterparty can create misunderstandings. English is my mother 
tongue and this might be thought of as an advantage, yet in an international 
environment one can know and use too many words. In England the use of 
complex language is taken to indicate a high level of education and can be 
perceived as exclusive. In the USA, less complex forms of English are employed 
and this can achieve more successful communication. Speakers of English as 
a second language oen comment to me that US speakers are ‘so clear’ while 
the British are less so. In business development there is therefore a challenge 
to think in complex terms, yet to communicate clearly and unambiguously. 
The financial consequences of business development in pharmaceuticals are 
so great that you need to take considerable care to express yourself as clearly 
as possible and to check that your intended message was the one that has 
been received. 
Legal vocabulary is another minefield for the unwary in business development. 
When you are involved in negotiations and in contract draing, the wrong 
words or the wrong construction can be costly. It is as important to avoid 
omissions as it is misstatements. One way to mitigate the risk is to use a 
checklist for each transaction and for each part of every transaction. Although, 
as a business development specialist, you are unlikely to have legal training, 
you need to be familiar with legal forms of expression and terminology; you 
should also understand the structure of the different kinds of transaction 
likely to be used. Most US states use law based on English Common Law 
and so have inherited some of the more bizarre terms that grew up over a 
thousand years of British history, even though they have no clear relevance to 
the current US situation so this is the place to start. 
The basic building blocks of business development deals are, for the most 
part, contracts. These contain various degrees of complexity depending on 
the number of elements and parties to the contract. Partnerships and joint 
ventures are other legal forms with which the business developer will need 
to become familiar. Another part of the law which you will need to be familiar 
is intellectual property law which, in the pharmaceutical industry, underlies 
most of the value of the products. Some of the practical issues that need to 
be addressed by business development will be discussed in this book, but no 
aempt to pre-empt legal advice or interpret the legal mind will be made.
Communication across cultures is another complexity to be wrestled with in the 
business development world. Cultural complexity may reflect national cultures, 
or more subtle groupings, such as academic rather than industrial scientists 
or manufacturing and engineering compared to marketing or finance. Each of 
these groups may use similar words and phrases (in the same language) and yet 
mean very different things. Business development need not align with any one 
of these groups but you should be capable of understanding and interpreting 
communications between the cultures within your own company and between 
companies where a particular cultural bias may hold sway (such as among 
biotech companies where scientific principle may sometimes appear to be 
held in higher esteem than commercial concerns). There are obvious cultural 
differences between private, oen family-owned or family-founded companies, 
and public companies where a much more open style of governance is required 
of management. The balance between recognizing and understanding the 
needs of another culture with meeting the needs of your own company is a 
delicate one. 
The dominance of human nature over common sense is the subject of most 
literature and even in the context of a scientific industry (with so many 
otherwise rational people) there is no escaping the basic dumb instincts of 
humanity. A number of transactions which I’ve experienced have le all parties 
asking ‘What went wrong?’ aer things have not gone to plan. Sometimes the 
problem may be hubris, the pride of a leader not wanting to be beaten; perhaps 
it’s revenge for past losses, rivalry between old friends (oen from university 
or business school); sometimes you could believe it’s just plain deviltry. Yet, on 
occasion, deals are still done against logic or lost despite common sense and 
business development once the board has made its decision for beer or worse 
must see it through. 
Project management 
One of the major skill sets for any business developer is complex project 
management. ‘Complex’ because seing a target date for completion of a 
negotiation is a far cry from achieving it. Using a structured yet flexible project 
management approach in business development can help steer any undertaking 
and, without usurping the decision-making role of senior management, ensure 
a transaction is effectively managed and value created. 
As an integral part of project management, people management is a 
paramount skill. An intellectual understanding of a product area and the 
analytical skills to recognize its value are important but to move the project 
forward within the plan requires leadership, motivation, inducements, 
negotiation skills and force of personality. Measuring success in business 
development is a sophisticated process. The most obvious metric, deal flow 
(the number of completed deals), is a major part of the activity, yet of itself 
is inadequate. A favourite expression while at Roche was ‘the licensing 
department’s definition of a good deal is ... a deal’. Very unfair, but if rewards 
and bonuses are handed out on the basis of the quantity of deals there is always 
the risk that quality could suffer. On the other hand, when the value of a deal 
cannot be truly evaluated for many years where is the incentive to drive hard 
to get the deal done? Furthermore, value is not an absolute when considering 
the strategic effect of an asset acquisition on a portfolio. A product such as a 
diagnostic aid may only generate modest sales itself, but may be the key to 
incremental sales of a far more valuable product franchise. How then should 
the deal achievement be measured and rewarded? 
Process improvement 
Beyond acquisition or sale of products, there is also an opportunity to develop 
a business through improvements of process. These improvements might be 
made in distribution, procurement, document handling or any one of a number 
of other areas of the business where competitive status can be improved. There 
is no reason to exclude these from the business development remit. Indeed 
the overview that business development has of the process as it affects the 
company’s ability to negotiate for and integrate new products, can be held up 
as an excellent mirror to the organization where problems faced in a deal may 
have more general implications for the company. Correcting flawed processes 
has significant value and should thus be aended to as the means to augment 
the company’s development. 
A good business developer should be at the centre of the business, with a 
360° awareness of the influences and interactions that are part of the company. 
This involves siing at the centre of an information network and enabling 
communication between colleagues, proactively proposing and taking action 
on issues, studying and predicting the competitive environment, planning 
and informing the board on carefully evaluated options and taking charge 
of the processes of change in the organization. To do all these things requires 
responsibility, authority and freedom of action.

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Planning the Portfolio CHAPTER 
Portfolio management 
Every company can be thought of as following a broadly similar paern to the 
three ages of man: birth, growth and then death. However, the company, unlike 
a person, can be rejuvenated even if its products fail: introduction of innovations 
through research and development, licensing or acquisition can bring new life to 
the company. New companies are started on the basis of innovative technologies 
and suffer all of the problems of young children. Children have no support without 
a parent, they are highly susceptible to diseases and accidents and in the early 
years are unsteady on their feet. The same is true of a fledgling company. Yet, with 
luck and judgement, growth can be rapid leading to significant value creation in a 
short period of time. When a child reaches adolescence, this rapid growth brings 
its own problems: finding sufficient food, clothes to wear and a role in life. 
The parallel for a rapidly growing company is the need for investments 
in manufacturing, larger premises for administration and a broader portfolio 
of products. When personal maturity comes to the young person, it brings 
with it a steady income yet many dependants: there is a need to consolidate 
investments and provide for the long term. On the other hand, for the mature 
public company there is no option to consolidate and still provide a nearly 
steady income. Only by continued growth can the company maintain or 
increase its value. This is the imperative under which most companies are run 
and is the stimulus for business development activities across the board. 
One of the key activities of the business development role is maintaining the 
portfolio of products within the company. It is therefore necessary to understand 
the objectives of the company and to plan accordingly. Depending on the scope 
of the business development role within the company, planning may also include 
the creation and maintenance of company strategy. Alternatively the business 
development person may be the agent of the strategy created by the CEO and the 
board. In the larger corporations business development takes on a pivotal role in 
both the creation and conversion of strategy into practical applications. Strategic 
planning as a function, therefore, should be examined in some detail.

The most common evocation of strategic planning within a company is a 
5-year plan produced annually with the objective of taking a longer view than 
just the next year in business. This is largely a financially driven document, yet 
it also describes the current state of the business portfolio and, therefore, the 
strategic gaps which exist and must be addressed by business development. 
Each plan starts by looking back at the sales growth of existing products and 
at their forecast sales for the coming year in fine detail with projections for 
the following 4 years. The aggregation of the numbers from all products will 
describe the company’s growth as a whole and so will usually be the mark by 
which the company’s value and its share price will be judged. 
The assimilation and integration of detailed information into the 5-year plan 
is therefore critical for decision-making regarding capital expenditure, human 
resource planning and promotional costs. It will also determine the need for 
product acquisitions, and, on a grander scale, company mergers and acquisitions. 
In order to generate the background information for the 5-year plan a complete 
examination of the existing portfolio is required: a review of all activities which 
affect the conduct of the business. A number of different perspectives are required 
in order to describe the company’s evolution to the current point. These will include 
activities at subsidiary level and by therapeutic area. They examine activities from 
the perspective of research, development, manufacturing and marketing. The 
company’s performance will be studied intrinsically and also against competitive 
benchmarks: at product level, therapeutic area level and corporate level. 
Evaluating the company’s products 
A holistic view of the company’s activities is required if one is to examine each 
component’s contribution to the business and to determine which elements are 
contributing the most to growth and which elements are hindering growth. 
The sources of information for this review are found throughout the company. 
Essentially a pharmaceutical company template will include inputs from 
the CEO, corporate finance, corporate marketing, research, development, 
manufacturing, supply chain, medical and regulatory, and legal and intellectual 
property groups. Affiliate companies will generate their own 5-year plans 
which will be added to the overall view. These contributions will be aggregated 
into an overall view of the company’s potential. From a marketing perspective 
a now traditional method of viewing the company’s products is to produce a 
sales and growth quadrant analysis of the portfolio and categorize the products 
into one of four types: cows, stars, opportunities and dogs. This is shown in 
Figure 2.1.

The combination of high growth and high sales is the most desirable star 
position in the quadrant, while the low growth and low sales products are 
represented as dogs. The opportunities have high growth but low sales, as is 
typical of new products, while older products with low growth are said to be 
the cows for milking. Depending on the balance of the portfolio, investment 
would be directed towards the opportunities and stars, reduced for cows and 
withdrawn for dogs. This is a simple but effective analysis tool at a high level 
for mature companies with a broad portfolio. 
It is less useful in the context of a younger company where the portfolio 
will tend to fall into one or two categories, leaving lile strategic choice as 
to where to direct investment. The analysis is also restricted in its utility to 
marketed products. This is because development-level products and research 
projects have no performance to measure, only forecasts, and, understandably, 
the forecasts for all such projects will be good. It is therefore a good idea to 
take a different perspective when looking at the integrated portfolio of a larger 
company and to see the portfolio not only as a snapshot but as a continuum. 
Each project or product can be placed at a point along an axis of vintage and 
each cohort can be examined for the number of projects at that stage, along 
with their aggregate projected worth and the concentration of products in each 
Relative market share 
High Low 
Market growth rate 
Figure 2.1 Quadrant chart

therapeutic area. So the portfolio can be described as being weighted towards 
the early stage or the late stage, or perhaps as well balanced. The continuity 
of product supply to the market from the development portfolio is therefore a 
predictive factor for the company’s long-term growth prospects (see Figure 2.2). 
The relative strength or weakness of the company at each point in the 
development timeline will then be revealed. Each project’s contribution to 
company turnover, as it comes to market and then throughout its life cycle, 
becomes a more relevant measure of its potential worth. The combination of 
products both in terms of their financial contribution and of their financial 
requirements will also influence the financing requirements for the company 
as a whole. At one phase in the strategic planning process at Roche we came to 
realize that the timelines for many projects brought them to market within the 
same 18-month period. The implications for launch costs, field-force head count 
and recruitment programmes were extremely serious. As a consequence we 
aempted to make a risk assessment of the portfolio by asking the therapeutic 
area teams to assign to their projects a probability of success in reaching 
market. Not surprisingly their view was of almost uniform success, which was 
not helpful to us – we needed another method for gauging risk. Rather than 
going to external sources regarding these sensitive issues for benchmarks and 
the like, the views of the ten top function heads were taken in a modification 
of the Delphi research method. Each was asked to rate the projects on a scale of 
zero to ten on probability of success. Retrospectively we were able to judge the 
Launch Mid-stage Mature 
Figure 2.2 Product cohorts by vintage

value of those opinions and found them to be the most accurate guide from all 
our sources. While some argue that numeric analysis is preferable we became 
convinced that years of experience were a beer arbiter. 
Responding to changes in the market 
In the last 10 years the impact of patent expiry on pharmaceutical products has 
become more significant, and this is illustrated in Figure 2.3. For innovative, 
research-based companies, the sophistication of the generic drug manufacturing 
companies has had serious consequences on revenue. Twenty years ago, when 
a large product lost its patent protection the main erosion of market share that 
it suffered would take 2 to 3 years. Now, the aggressive pursuit of abbreviated 
new drug applications by generic companies both in the USA and in the rest of 
the world can mean a major product will now lose 80 per cent of its worldwide 
market share in less than 3 months. No longer is there a graceful degradation 
in what was once a quite steady market. The more successful the patented 
product has been, the greater the loss. 
This phenomenon has had a dramatic effect on strategic planning within 
large pharmaceutical companies. The resulting abrupt removal of several 
billion dollars in annual profits makes the maintenance of a strong research 
and development portfolio absolutely vital. Much has been wrien by equity 
analysts over the years about the relative strengths or weaknesses of companies’ 
Figure 2.3 Patent expiry

portfolios, yet none of the larger companies has been able to demonstrate 
an adequate flow of new large products from its own research. The natural 
consequence of this has been an ever upward trend towards in-licensing of 
products. Looked at simply, if you have $10 billion in sales, then each year you must 
add another billion dollars in sales if you are to produce double-digit growth. The 
consolidation of the industry over the last 10 years has meant that corporations 
are now much larger than this and annual growth requirements may be as much 
as $5 billion. Combining these figures with an equal drop in revenues through 
patent expiries can mean a requirement to produce far more. Hence it is a safe 
prediction the company acquisitions will continue apace and that in-licensing will 
continue to dominate the market as the means to generate corporate growth. 
Nevertheless, internal research and development programmes continue to 
be a mainstay of expenditure among the larger organizations. However, this 
is risky: estimates of the success rate in drug discovery produce a picture of 
massive failure (see Figure 2.4). 
The number of chemical compounds which are potential drug candidates 
and which will need to be screened for activity in order to generate a possible 
compound will be in the tens of thousands. In former times it took many years to 
achieve success in this area and there was a low yield per thousand candidates. 
Today, despite new and massively automated screening techniques, there has 
been no significant increase in the number of candidates with the potential to 
become a drug. Even automated screening techniques have not significantly 
increased the number of candidates with the magical potential to become a 
Targets Preclinical Phase I Phase II Phase III 
1000s 100s >10s <10s Singles 
Required deal flow 
from BD 
Figure 2.4 Discovery success

drug. The confluence of aributes which constitute a molecule that is both 
safe and efficacious is a rare event. Rarer still is a molecule which has these 
characteristics and will prove beer than existing therapies. Furthermore the 
advances in diagnostic analytical techniques have revealed a great many more 
adverse events which compounds in development must avoid. As a result the 
regulatory hurdle for products has risen progressively. The corollary of this 
is that companies are much more cautious about investing in their researchlevel 
compounds unless and until they can demonstrate a level of safety far 
beyond previous standards. As the cost of bringing a product to market is now 
estimated to be as much as $800 million, if the product is unlikely to be able to 
address a wide market the cost of development is prohibitive. It therefore makes 
sense for companies to invest in products which have already been developed 
to a stage where the safety has been established. Once again this sets the stage 
for a vastly increased focus on in-licensing. The larger pharma companies are 
now locked in a bale not only for market share but also for privileged access 
to the early stage compounds which will form the products of tomorrow. While 
this trend is probably unsustainable in the long term, at the moment none of 
the larger players can afford to back off and allow the others free access. 
Incorporating products at the development level permits a leavening of the 
portfolio mix and a reinforcement of weaknesses in portfolio strength. It also 
guards against arition of one’s own products’ failure to progress to market due 
to scientific risks. The objective of strategic planning therefore is to achieve an 
optimum balance of investment in internal research and external acquisitions to 
justify investors’ confidence, by demonstrating a continued ability to generate 
strong growth in a highly competitive market. As the capital base of each 
company expands so the demands to provide a competitive return on investment 
and earnings per share will increase. It is only by demonstrating a solid business 
plan that investors’ confidence can be gained and retained. Failing that the only 
remaining route for a company is merger or acquisition (see Figure 2.5). 
Balancing the portfolio 
In evaluating the planning dimensions that must be considered in order to 
balance a portfolio three major areas should be played off one against the other. 
These are: 
life-cycle management 
development and 
overall portfolio balance. 

None of these is independent of the other: products may be brought into 
development along the timeline of vintages; these may be inserted into one 
or more therapeutic areas and matched for their profit or market size. Major 
brands can be reinforced by life-cycle management initiatives including new 
formulations to extend the main franchise, different forms to suit a wider 
catchment of patients and the extension to new indications possibly by the use 
of different or novel formulations at the same time. 
There are, however, increasing pressures on simple life-cycle enhancements 
by formulation changes. Recent work by Hans Demers of Novartis has shown 
that of all the patent applications for new formulations of older products made 
in the last 5 years, 80 per cent have faced patent oppositions – all from generic 
manufacturers trying to prevent the extension of the main brand franchise (see 
Figure 2.6). In fact as few as 25 per cent of the applications filed have actually 
been granted at all and most of these have been changed to some degree with 
narrower claims or reduced scope. 
This restriction to the freedom of companies with original intellectual 
property (IP) is rarely heard about yet it highlights the continual need for new 
compounds as a source of growth, in addition to extensions to the life of existing 
products. The chief means of supplementing a company’s own research and 
development thus remains the in-licensing or acquisition of products through 
business development. Indeed much business research has shown that the 
growth of the top companies has been largely due to their ability to acquire 
products in these ways, to develop them and to bring them to market. Specialty 
companies, such as Forest, Shire and Reliant, have since been built entirely 
from these sources and are forces to be reckoned with in the marketplace. 
Figure 2.5 Mergers and acquisitions 
Merged or 

Balancing the portfolio by the inclusion of in-licensed compounds can be 
more expensive and deliver less profit in the long term, yet the reduction in risk 
associated with in-licensing counterbalances these shortcomings. Overall the 
portfolio represents both the supply side of the company’s innovations and the 
demand side through the gaps that open up between its own products in time, 
size and profitability. Whether the business development department is the 
strategic planning department or works closely with a separate function, the 
integration of this plan creates the motivation for in-licensing acquisition and 
divestments. Continuous analysis of the marketplace including competitive 
intelligence, market research and benchmarking of the company’s performance 
as a business will provide a backdrop to the company’s competitive status and 
relative araction to the capital markets. The value placed on the company’s 
shares will dictate its ability to borrow money at a given rate. The more secure 
the company’s earnings appear, the more confidence investors will have and 
this will be reflected in the company’s cost of capital. The cost of capital then 
becomes the internal hurdle against which projects must be judged for inclusion 
in the portfolio as it will be one of the reference points for the discount rate 
applied to licensing transactions. In the network of risks and rewards the 
financial hurdle will always be present yet, as it is observed in many financial 
textbooks, return on investment is typically far higher in the long term when 
invested in operational businesses compared to financial instruments. The risk 
is much higher but then so must be the rewards. 
In the pharmaceutical industry large profit margins have been justified by 
the risks the industry undertakes. The ever-increasing estimates of the costs 
of drug development are testimony to the concentration of risk on individual 
products. The probabilities of a novel pharmaceutical compound succeeding 
are very small indeed. The complexities of human biology allied to the genetic 
variability of patients and the range of ages, states of nutrition and status of 
2001 2002 2003 2004 
Opp. rejected 
Figure 2.6 A61k patent oppositions

their immune systems argue against the possibility of a universally safe and 
effective pharmaceutical medicine. As regulatory agencies become less tolerant 
of risk, the chances of finding such a therapeutic agent are reduced. An era of 
individualized medicine brought about by the exquisite precision of current 
diagnostic methods would be welcomed by clinicians yet would demand radical 
change in the pharmaceutical marketplace. The economies of scale achievable 
through the discovery of a blockbuster drug would be lost and with that 
extraordinary levels of funding which are currently applied to drug discovery 
and development. Without these levels of investment the means to provide 
adequate data to support regulatory submissions would disappear. Recent 
history has shown that in the first-world products delivering an extension of 
life in what is called catastrophic care situations will be afforded by those who 
can pay. The continued development of such medicines would therefore seem 
to require an imbalance in the market where innovations are paid for by the few 
in the short term with an extension to a broader population following patent 
expiry. There is an impatience with this system yet no other adequate model 
has been proposed as a substitute for it. 
The portfolio of a company will therefore always be a compromise between 
short-term pressures and long-term objectives. For smaller companies shortterm 
pressures will remain the primary focus as the main commercial objective 
is to aract sufficient funds to continue the development of the products in the 
portfolio. For the largest companies long-term planning must form a significant 
part of their platform. In between, companies have a choice: to concentrate on 
short-term measures and focus their business model or to diversify and play a 
longer game. Publicly traded companies have fewer options than those which 
are privately held as they must compete for funds with companies from other 
sectors. Privately held companies have the relative luxury, once they are cash 
positive, of choosing the direction and timescale of their development; however, 
the speed of change in the market has unseled a number of traditionally 
privately held companies to the point where their founders have sold their 
stakes and exited the industry. 
There are several clear trends emerging in the world market but as yet 
these are not convergent. Indeed some of the trends can appear to be mutually 
exclusive. As a result portfolio choices have never been more difficult. It seems 
likely that the markets will remain turbulent but the demand for improved 
health care across the globe will remain insatiable. It remains to be seen 
at what cost this demand can be satisfied and whether a company having a 
mixed portfolio will be more sustainable though generating lower growth or 
if a concentrated portfolio of specialist products being continually supplanted 

through constant innovation can be maintained in the long term. The choices 
for top company CEOs are few, yet with a planning timeframe in tens of years 
compared with employment tenures of 5 years or fewer, it is possible to imagine 
that short-term objectives may override long-term concerns.

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Identifying the Needs CHAPTER 
I received an email this morning from a client who has been asked to provide 
information on potential takeover targets for his company and he asked me 
how they might go about such a transaction. Their target price was in the range 
of $50–100 million. While this is not be an unusual request for an adviser in 
M&A to receive, when it is put to someone in business development a series 
of questions about just why and how the company has made this decision is 
raised. In order to understand the background to such a request the structures, 
processes and practices of business development in different company 
situations needs some examination. 
Many of the largest companies have business development departments 
which are split into three main functions. These are: 
search and evaluation 
alliance management. 
I shall come to look at each of these broad headings in turn, but in the first 
instance it is ultimately necessary to establish why you want to search and, 
not surprisingly, for what. If the search is for a product the approach would be 
different to that taken to find a partner for a research programme, and different 
again if seeking to make a takeover. In order to choose any one of these as the 
best way to improve the business and take the appropriate path a review of 
the pressures and opportunities the company is facing must be completed. In 
order to achieve this you will need a method, a ‘what to do’ to improve the 
business. So there is a need to look at the current situation of the business, to 
make some judgement about its worth and its direction and whether or not 
to do something about it. Only then can you come to the decision about what 
should be done and how. The primary issues concerning any business relate to 
its state of health, considered in each of its parts and as a whole. In other words, 

is it fit for the job? Then, if one is somewhat philosophical in nature, perhaps 
one might ask: ‘What is the overall purpose of the business?’ 
This brings me to probably the most basic (but oen forgoen) trio of 
management fundamentals: objectives, strategy and tactics. 
Objectives are on the horizon, strategy is the starting point and tactics are 
the steps on the way. The indiscriminate use of these words is perhaps one of the 
more challenging issues in business development as the terms are so oen used 
synonymously. If an objective is not known and not clear, then no strategy will 
have a point and any tactics will be far more likely to do harm than good. If the 
business development function can bring discipline, in terms of understanding 
and using these words, to the organization in which it operates, then much will 
have been achieved. One of the best ways to distinguish between these terms is 
to define them simply. An objective might be to go to London; this objective then 
might be modified by such words as ‘fast’, ‘in luxury’ or ‘most economically’. 
A strategy can then be chosen to suit the selected objective. One might go by 
train, plane, car, barge, bicycle, walk or any number of other alternatives and 
then tactically one can choose to travel early, midday, late, or overnight. The 
objective is clear – to go to London – the strategy dictates how and then the 
tactical choices become clear. 
In business the word ‘objective’ is oen not used so explicitly. For instance 
the business objectives of a 5-year plan can sometimes seem to fall foul of 
Figure 3.1 Objectives, strategy and tactics

the sort of ‘mission statement’ which calls for ‘leadership’ in perhaps social 
responsibility or some such phrase, whereas an objective is a definite and 
measurable thing, not a loosely phrased ambition. To my mind there should 
be no such opportunity for confusion in the objectives of a business if they are 
thought through and articulated properly. 
The old and well-tried SMART acronym (Specific, Measurable, Achievable, 
Realistic and Timed), when applied to objective seing, allows lile latitude for 
flowery speech and is therefore an excellent axiom for business development 
to stand by. First, an objective must be specific. For example, if you state your 
objective as being ‘market leader’ – or worse ‘a market leader’ – this has almost 
no meaning. On the other hand, if you state it as becoming the clear market leader 
by a stated percentage of market share, this is specific. It is also measurable: 
the second of the tenets of a SMART objective. Introducing a metric, like this, 
makes it possible to reveal the nature of the objective in relation to competitors 
or previous performance. However, a metric is not enough: market leadership 
might be achieved but for only a single day. The ‘T’ in SMART signifies time: the 
objective must be reached for a specified period of time and also by a particular 
date (for how long and by when). 
The other major elements of SMART are the ‘A’ and the ‘R’: achievability and 
realism. These really are the test of a management’s ambition and resolve, yet 
also of its compassion and honesty. Managements need to set ambitious targets 
for themselves and their teams, yet these targets must be grounded in reality; 
shooting for the moon is not possible without the resources and opportunity to 
get there. While sometimes a target that really stretches capability can bring a 
result which is greater than either management or staff initially believed they 
might achieve, at the same time if the goal is set so high that it is unaainable it 
becomes a disincentive to trying. Achievability as a theoretical concept can be 
hard to quantify beyond a certain threshold, because the only way to test it is 
to try it; even so some goals are plainly out of reach either due to the capacity 
of a market to change either over time or because of saturation of the available 
customers. In declaring an objective therefore one must guard against overoptimism. 
There is a fine line between success and failure and at times it is 
prudent to under-promise and over-deliver. Consequently an adage I carry in 
my mind always is, in my opinion, ‘the true definition of a failure’ and that is: 
‘A man who aims low, and misses’. 
So a SMART objective is the cuing edge for business development. It 
allows you to separate empty words from hard, clear decisions. It helps to keep 
your feet on the ground and to be honest in, and to, your ambitions. For the 

business, seing objectives and understanding them helps to refine the rest 
of the organization’s activities towards the best outcome. ‘SMART’ is a way 
to think clearly about where you are going and what it’s worth. In practice 
the differences between a big business and a small one are slight, but in big 
companies an individual may perceive themselves as having no volition or 
free will: the organization and its history have such momentum that a single 
person can have lile impact. In a small company the opposite can appear true 
and it can seem that every decision, every action, can have an immediate and 
dire consequence. Having worked in both circumstances and in several places 
in-between, I’ve had some excellent tutors who helped in dealing with these 
perceptions. At Roche I was privileged to be in at the beginning of a number of 
initiatives (which since have borne fruit). At the time when an idea comes to you, 
seemingly alone, amongst 50,000 other employees, it seems hard to believe that 
idea could be made to take root. Yet if you put ideas forward it will not be long 
before colleagues either respond to a good idea or reject a bad one. Naturally 
good ideas rarely have only one origin: in fact most only take root because 
many people have drawn the same conclusions more or less simultaneously 
and someone must speak out for change. Business development can therefore 
act as a lens to focus ideas and to articulate them on behalf of the business. 
I’ve frequently been wrong over the years by backing what seemed a good 
idea only to have it (correctly) shot down by my colleagues. Yet these instances 
are rapidly forgoen and even if one gains a reputation for being adventurous 
there has to be someone in the organization, and it is not so strange that the 
beer idea an idea is, the sooner it somehow become someone else’s great idea! 
The job of business development in these situations is to somehow advance all 
that seems good, take the laughter when it’s wrong and perhaps share some 
of the credit when success arrives. That at least in a big business can bring 
By contrast, in a small business as the relationship between the decision, 
statement and action are relatively short it can feel like everything is out of 
control and that experimentation is dangerous. While up to a point this may 
be true, with hindsight many of these decisions become quite trivial. As Bill 
Burns, CEO of Roche Pharmaceuticals, oen says, ‘Everything has its rhythm’ 
and Brian Moyse, former marketing manager at G.D. Searle in the UK, used 
to tell me many years ago: ‘Let’s wait a bit.’ Bill and Brian, with the benefit 
of many years of experience, were both saying: be prepared to let time take 
care of the crisis and guess what, quite oen it does. In the world of business 
development oen every day has its crises, and there is always pressure to 
perform, yet even when the size of the organization is taken into account speed 
is not usually crucial, particularly when it comes to taking action. In theory the 

bigger the relative importance of a decision, the more considered it ought to be. 
Despite the apparent urgency of some decisions they can oen wait. 
In sum, if the objective is clear this can be informative for every subsequent 
decision in the business. When faced with a choice between one alternative and 
another at a strategic or tactical level the clarity of the objective and the way it 
is articulated are of the greatest importance. 
Portfolio objectives 
Let us return to the colleague who e-mailed me this morning about providing 
information on potential takeover targets for his company. He had framed his 
question to me wrongly and, without knowing his company’s objective behind 
the takeover it was difficult to give any useful advice. So what is the objective? 
Has his company suffered a setback and is it being forced to make changes? 
Does it lack for opportunities in its home market? Are its competitive status 
or pricing not aractive in its locality? Were its products old and unaractive? 
Maybe the company sought a takeover because the targets were in new and 
demanding markets and partnering or licensing would not be sufficient? Prey 
much all companies’ objectives stem from one of these situations and this is 
why I term the opening gambit for assessment a ‘situation analysis’. 
Every company’s business situation will be an amalgam of its portfolio, 
its finances, and the management and operational strengths. A cross-analysis 
of these elements can be summed up as the strengths and weaknesses of 
the organization, the company’s internal aributes. These aributes can be 
contrasted against each other, and expressed as: ‘This is either done well or 
badly in or by the company’ in an empirical assessment. It is also possible to 
gain some view of best practices within and between industries by means of 
benchmarking studies of other similar companies. However, benchmarking is 
only useful when the organization has a clear assessment of its own resources. 
In other words if you think something in the company is poor anyway, knowing 
that competitors are beer or worse doesn’t help. 
An evaluation of the company’s functional capability to execute its plans will 
be the basis for deciding if an objective is currently achievable and realistic. If 
this is not the case changes to the organization will be required in order to meet 
the objective. The relationship between the internal landscape of strengths and 
weaknesses and the chosen objective will thus be one of the key considerations 
in seing the objective. When a company is small or has a limited geographic 
scope it will not have the resources to undertake a multinational product launch 

on its own. Yet this does not prevent it declaring this as a valid objective if it 
opts to partner its product with a bigger company. It will, however, have to give 
up pretensions of being the ‘leader’ in this case. 
The other side of the situation analysis though is the real world. Here, 
competitors will be moving independently of the company’s internal concerns 
and it is by looking at the activities of these competitors and at the market itself 
that opportunities will be revealed. The results of the company’s performance 
must generate improvements in turnover or profit for its shareholders, but to 
remain aractive as a continuing investment these improvements will also need 
to be reflected in comparable or beer growth than national or international 
Quantifying SWOT 
Normally it is the role of the business development function to monitor and 
take action to ensure growth through the acquisition of assets; occasionally 
the best interests of the shareholders will be served by an exit and a sale of 
assets or even of the company. However, for the purposes of this text it will 
usually be assumed that the situation analysis indicates that opportunities 
exist and the business has the necessary strengths to address them. Following 
this assumption, the remaining players in this drama are the markets 
themselves for they are both the actors and the stage. This may be at the level 
of market of customers for products, markets of competitors or markets for 
stock in companies vying for investment to exploit their opportunities. The 
movements of markets can be seen as being independent of a company’s 
actions or responsive to them. Customers will respond favourably to products 
by purchasing them, competitors will move to counter each others’ promotions 
and investors will make choices of where to put their money. The situation 
analysis also needs to include the current trends in customer acceptance, 
competitive activities and stock market trends. These external influences 
represent the Opportunities and Threats which a company must address 
and overcome to succeed. Between the internal and external influences lies 
the opportunity of profit and contrasting the elements of these dimensions 
is oen referred to as a SWOT analysis (see Figure 3.2). The Strengths, 
Weaknesses, Opportunities and Threats are the cardinal points on the map of 
the company’s situation analysis at a single point in time and will define its 
potential in relation to its objectives. Calibrating the relative merits of each of 
these elements reveals not only the current state of play for the business but 
its potential for change; for every threat there is an opportunity and for every 
weakness a need to strengthen it. Yet to make this analysis requires a method to 

standardize the assessment of what can be very different influences. A method 
I have adopted successfully in business planning and business development 
arises from my time in Marketing Improvements Ltd where a technique we 
knew as a Numerical SWOT was developed to assist in discriminating market 
segments for the enhancement of product marketing plans. Making suitable 
amendments for the purposes of business development the method is equally 
applicable to the situation analysis and can help in the selection of appropriate 
opportunities for acquisitions and licensing in pharmaceutical markets. 
The method is simple and yet sophisticated enough to render a visual 
representation of the result not seen in the traditional listed results of a SWOT. 
In the numerical version each of the variables is assigned to one of the 
two scales, Strength and Weakness or Opportunity and Threat – and given a 
ranking and a weighting. This would not work if the variables in the description 
remained contrary to one another. In order to standardize the inputs in a way 
which can be represented clearly in a graphical form all the aributes with any 
negative connotation and the weaknesses and the threats are reworded. For 
instance, if your clinical trial results are not strong, instead of writing, ‘Weak 
clinical trials’ you would write, ‘Strong clinical trials’. You might also evaluate 
this aribute to be the most important for the success of a product, in which 
case it would be ranked at No. 1 of all the strengths and weaknesses. In order 
to differentiate how much more important this aribute is, all of the aributes 
Opportunities Threats 
Figure 3.2 Traditional SWOT

will be allocated points from a total of 100 to show a relative weighting. In 
this case it might be 30 points out of 100 and would be the most significant 
aribute. Yet we know that originally the clinical trial aribute was a weakness 
so, to restore the balance, the aributes which make up a strong opportunity 
for this product are given a negative score. The range of scores runs from -1 for 
negative aributes through 0 (zero) where the aribute is important but the 
aribute is neutral in this respect through a range of positive scores from +1 to 
+3. In this way the SWOT can describe the ideal aributes for an Opportunity 
or Strength and then, through the scoring mechanism, describe how closely 
and in what respects an Opportunity fits the bill and how and where it differs 
from others under evaluation. In this case where strong clinical trial results are 
very important a negative score would almost certainly lead to the opportunity 
being dismissed if other products score positively (see Figure 3.3). 
Figures 3.4 and 3.5 show two possible in-licensing opportunities and how 
the method can reveal the ‘fit’ of each to the internal landscape or the relative 
merits with regard to the marketplace and be ploed against each other and a 
quadrant chart produced to visualize the result. 
The advantage of visualizing the results is that the significance of the 
aributes which define the opportunity can be drawn out. If the product is 
strong but the market is weak or massively competitive the ability (and 
willingness) of the company to take up the challenge can be tested. Moreover, 
Figure 3.3 Numerical SWOT components

Figure 3.4 Numerical SWOT chart 
0 100 200 300 
Opportunities and threats 
Strengths and 
weaknesses Figure 3.5 Numerical SWOT interpretation 
0 300 
Opportunities and threats 
Strengths and weaknesses 

because the contributing factors, the aributes, have been identified and 
quantitatively differentiated, a plan can be made to address internal shortfalls if 
it is believed that the market opportunity exists and is of sufficient comparative 
worth to others be they internal or external to the company. By cross-casting 
different scenarios in relation to business development opportunities, the 
relative araction of an opportunity can be gauged as well as the achievability 
or realism. This approach can even be adapted to assessments of projected 
business plan outcomes in different scenarios and so can be used to determine 
the beer of different alternatives. Where a situation could be more aractive 
if a change were made to the business, such as increasing the field force or inhouse 
manufacturing, then an alteration to the business can be put in hand. In 
other words the lists created to demonstrate the SWOT become a diagnostic 
for how to improve the business both internally and externally. Modifying the 
internal landscape can enhance existing products and/or external opportunities 
can enable a much enhanced performance from the existing organization. 
By using this discriminative tool it is possible to build up landscapes of 
positive and negative aributes which will reveal the gaps between the current 
situation and a desired objective. From this can come the menu of opportunities 
which business development can seek in the marketplace, in other words the 
strategic alternatives. 
Locating gaps 
But before business development sets out to go shopping a closer idea of the 
requirements is needed. Each market can be thought of as being a landscape, 
populated with competitors and customers in varying states of strength and 
activity. This becomes the environment in which a product must exist and 
survive. The perception of any product will be affected by its environment so, 
depending on the context, the same opportunity might look beer or worse. 
While it isn’t always possible to achieve an ideal it is nevertheless necessary 
to know the relative araction of the available products to establish an idea of 
their value. Just the other day I was approached by a company ‘on the product 
acquisition trail’ who had discovered a licence opportunity which was marketed 
in Europe and which was apparently available for the US market. The product 
claimed to act as a disease modifying agent for osteoarthritis; moreover this was 
achieved through a recognized mechanism of action (this sort of information 
is of major importance to most major pharmaceutical companies). Because the 
product had been on the market in the EU for some years it had proven safety 
data and tested manufacturing methods and, according to the owner, much of 
the preclinical work would be acceptable to the FDA. It sounded ideal to the 

US company but a quick look at the clinical data available from the existing 
markets revealed that while the product did actually have the claimed disease 
modifying effect, unfortunately at the best-tolerated dose the effect was so slight 
that there was no benefit over any standard therapy. Thus despite the package, 
the history and the superficial araction I strongly advised the company not to 
pay the $20 million upfront access fee which was being demanded, never mind 
the following $30 million in milestone payments they were asking and the 
further $50 million required in clinical development costs. Even then it would 
not be sure of gaining market approval! In addition, the product would have 
needed strong marketing to achieve enough market share to pay back this level 
of investment cost and this was well beyond the client’s funding capability. In 
this case although the description was right – if misleading – the price was very 
wrong and so was the clinical effectiveness. Altogether therefore each product 
needs to meet the complete profile for the market and the company. 
Gap analysis 
In order to make best use of the situation analysis from a strategic perspective it 
is wise to look not just for opportunities that are currently exploited but also for 
those which have yet to be addressed in the marketplace. ‘Clarior e tenebris’ is 
the Latin phrase meaning roughly ‘Clearer from the darkness’, which indicates 
that the obvious or superficial evidence from a set of data may not tell the 
whole, or even the correct story. In a market analysis it is oen the silhouee 
of an opportunity which reveals its underlying value rather than a direct view. 
To be useful in a systematic approach this method needs to be codified in a 
manner which helps business development both to see and show others where 
opportunities lie beyond and between the obviously exploited areas. This 
is oen referred to as a ‘gap analysis’, during which an examination of the 
marketplace is conducted first from one perspective and then from another. 
These two views may then be compared and the resulting combinations or 
subtractions can show areas which may be of potential interest. These areas 
must of course still obey the rules for being Achievable and Realistic and these, 
to a large extent, be determined by choices made in the selection of parameters 
for the analysis. Loose definitions usually lead to loose analyses and a lack of 
clarity gives an impaired ability to address the opportunity even where one is 
identified. Using the criteria of Measurability, Timing and Specificity, in this 
case a tightness of definition, is again SMART when allied to the other two 
criteria, so this reversal of the definition can bring a penetrating view to the 
process of analyzing the market. Thinking graphically, the first two axes in 
such a multidimensional analysis are the (closely defined) market size and the 

market growth. In order to give some elaboration to the market view this may 
also be broken down by product or if a functional or need-based segmentation 
has been identified in the market which overarches the product definitions 
this can sometimes be illustrated through such techniques as factoring and 
clustering which are oen used in statistical analysis of large data sets to reveal 
paerns not seen by looking at the raw data. 
In health care the existence of a number of different sources of high quality 
and detailed quantitative market data for such analyses confers an advantage 
over many other industrial markets. This is not so in many other business 
markets, such as chemicals or other commodities, and is more akin to consumer 
market data. Hence it is possible to generate analysis of data at a high level 
of granularity at a quantitative level rather than having to rely on qualitative 
research based only on small samples of the market for the estimation of 
segments or, of product use. 
The initial analysis is frequently represented in chart form to highlight 
salient features such as growth versus size, where segments may be represented 
by circles and with each product’s market share shown within (see Figure 3.6). 
In such a diagram it is then possible to see the relative value of one sector 
versus another as well as the share each product takes of each segment and thus 
its respective power in each segment. By these means it is possible to see that 
Figure 3.6 Growth circles

while a segment may look aractive from the point of view of size it may be 
poor from the point of view of growth. It might also be dominated by a product 
from a single large manufacturer. This may then lead to an examination of the 
competitive landscape within the segment. It could be that a large segment 
dominated by a powerful leader may be thought unaractive if that leader’s 
product is relatively new and receiving strong marketing support. Conversely, 
if the product is old it may be about to suffer generic substitution resulting in 
a collapse of the segment’s cash value (even though the sales volume would 
persist). However, if your own product has sufficient functional advantages 
over such a product or situation neither of these constraints may prove to be a 
Functional advantages 
A good example is the prescription use of Prilosec, branded ompeprazole 
and once the largest product in the USA, versus Zantac, branded ranitidine 
and the largest product by sales value. When the Zantac patent was about 
to expire there was considerable speculation that generic forms of ranitidine 
would stop the growth of Prilosec by providing an effective and cheap form 
of ulcer therapy. In the event, Prilosec’s growth was not only undiminished 
in the ulcer segment but accelerated by the addition of an approval for GERD 
(Gastroesophageal Reflux Disease, sometimes known as Acid Reflux), which 
became a new segment. Although Prilosec was sold at a premium price over 
both Zantac and generic ranitidine, it had a functional advantage over Zantac 
– Prilosec relieves ulcer pain sooner aer the start of therapy than ranitidine. 
Thus US physicians found it nearly impossible to persuade patients to change 
to a cheaper form (even though this mitigates the cost to the patient). 
This kind of insight into the dynamics of a market is important in identifying 
underlying features which may contradict what would otherwise be a logical 
conclusion. In this case a well-known and effective product, available at a much 
cheaper price, would logically be an aractive alternative for patients. Market 
research conducted at the time clearly showed, however, that patient behaviour 
would overcome ‘natural’ logic. Here again it is the role of business development 
to look at opportunities at a more than superficial level and develop scenarios 
for potential future markets which include social and contextual influences. It 
is worth noting though that some trends are ‘climatic’ (such as the increase in 
market size due to increasing population) and therefore cannot be changed by 
a company while others can be considered as ‘weather’ (to be short lived) and 
in these cases the company might take avoiding action or take advantage of the 
situation. However, the health care market is increasingly a consumer-driven 

one, and as a result other trends are emerging that can be enhanced or even 
stimulated by the industry by means of promotion. There have been claims made 
of late that certain diseases, such as Aention Deficit Hyperactivity Disorder, 
and some other social and psychological phenomena have been exaggerated or 
invented by the pharmaceutical industry to generate an unwarranted number 
of prescriptions. Such practices would be avoided by the industry especially 
if the motive were to ‘invent’ disorders solely as a means to increase profits. 
There is ample real and serious disease which deserves the investment of time 
and money to serve that purpose. Furthermore the pharmaceutical industry 
is also generally unlikely to gratuitously feed such ammunition to its critics 
unless there is a sufficient medical demand for such therapies. 
The facts of the maer are that physicians have turned to pharmaceutical 
products in an aempt to provide symptomatic relief for their patients’ problems 
based on observations of patients receiving the products in other situations. The 
companies involved have responded by undertaking the clinical trials needed 
to prove the benefit and gain approval for these products so responding to a 
market need. 
The discovery of true medical needs by retrospective analysis of data has 
been demonstrated clearly. Minocyclin is an example of a drug subjected to 
such an analysis, which brought about a new product. It had been noted that 
although minocyclin was originally developed as a broad spectrum injectable 
antibiotic with use in diseases such as anthrax and cholera, acne responds well 
to low doses of the oral form of the product. It was therefore reformulated 
specifically for acne and marketed for adolescent acne, particularly for girls. 
The resulting improvement in spots also brought about an improvement in selfesteem 
and this, doctors noted, reduced the need for antidepressants and other 
medicines. Indeed, the prospective treatment of essential benign hypertension 
for the prevention of coronary artery disease remained an unproven theory 
for many years before epidemiological data collected over the last 20 years 
demonstrated that this specific intervention has brought about major risk 
reduction of heart aacks (when combined with other risk factor reductions) 
and that this was particularly so when introduced early in treatment. Yet I 
remember well many publications offering criticism of the practice of treating 
mildly raised blood pressure and citing it as an invention of the pharmaceutical 
industry and merely for profit. In fact at the end of the 1980s many UK doctors 
declared that diuretics and beta blockers (newly available as cheap generics) 
were perfectly adequate treatment and that research into new agents was a 
waste of money which would be beer spent on more relevant diseases such as 
malaria. While malaria has had less aention than one would like, the advent 

of ACE inhibitors and Co-enzyme A inhibitors – and their recent adoption as 
the new ‘best practice’ in the treatment of hypertension and so the reduction in 
the incidence of heart disease – acts as clear witness to the value of farsighted 
analysis of the functional needs of the market. These will oen show the 
shortfalls of existing therapies and reveal the gap which needs to be filled 
which can encourage scientists if they believe they can deliver a beer result 
from a new target elsewhere in the treatment pathway. 
There are several ways of reflecting segmentation which can be helpful to 
business development analysis. One is the classic organization chart (see Figure 
3.7), an approach which represents the segments each as a daughter set of a 
larger group. 
This is perfectly reasonable if there is a clear relationship and differentiation 
of features between the segments in question. In an analysis of pharmaceutical 
functions or of anatomy, for instance, using these descriptions as group terms 
is quite logical when based on the needs of the market (defined as patients 
suffering from a particular disease or of the physical functions of a product). 
These groupings benefit from being able to define how many patients exist or 
how much product has been used according to the definitions used. This classic 
approach is less effective where quantification is difficult or differentiation is 
weak. To take a non-health-care subject, washing powders may be segmented, as 
in Figure 3.8, where a physical description of the products can be differentiated 
and then, by use of qualitative research, estimates of the numbers of customers 
who use the products in a different manner can be made. 
Peripheral Central 
Pain Brain Spinal Motor Pain Sensory 
Figure 3.7 CNS organization chart

A sample of 1000 house-persons, stratified by socioeconomic class and 
geography, can then act as a model of the washing powder market; it can be 
extrapolated to the whole population by mapping the sample to the country’s 
census data. 
In pharmaceutical markets segment analysis can be more complex for, 
despite the existence of fairly comprehensive data on the incidence, prevalence 
and treatment paerns of diseases among patients, there are, even so, problems of 
definition. Drugs by their very nature are oen effective for more than one disease 
as they work on mechanisms in the body which are involved in the genesis of many 
diseases. As a result segmentation based on the active pharmaceutical ingredient 
may be misleading since it ignores these functional differences. Segmentation by 
disease too can be effective as a marketing tool when used prospectively as in ‘drugs 
used to treat high blood pressure’ but can be hard to measure in practical terms. For 
instance, a drug used for hypertension may produce its effect pharmacologically 
through vasodilatation; this action may also make the drug useful for diseases 
such as Reynaud’s syndrome, where peripheral blood vessels go into spasm and 
cause painful local blood loss in fingers or hands, or in congestive heart failure, by 
reducing the ‘aerload’ on the heart (or the central blood pressure the heart must 
beat against) and this can confound useful analysis. 
Portfolio constraints 
This brings the question: by which segment or segments should the drug be 
assessed? Each of these segments will have its own dynamics and so will be 
Figure 3.8 Market segmentation by product function: a gap analysis 
Hand Machine 
Colour Whites Colour Whites 
Wool Cotton 
< 40. >40. 
(life cycle) 
washing powders

more or less penetrable and more or less rewarding. The number of patients 
in each will be different as will the benefits of treatment and so will have a 
different potential value. Consequently although a drug overall may have 
many segmental opportunities, the inequality of these opportunities should 
lead to a great many segments being discounted for purposes of evaluation. 
Thus, rather than using a classical approach as a standard method, it is 
quite oen necessary to take a multidimensional view of a product’s potential 
by assessing the various definitional possibilities. The objective here is to seek 
the best opportunity and this is made up of the combination of the product and 
its market. A superb product in an impenetrable market will have less araction 
than an adequate product in an easier market from an economic perspective. 
Indeed, much of the proliferation of so-called ‘me-too’ products, which 
companies prefer to developing products for small indications (or specified 
uses for drugs), stems from this economic imperative. A great many companies 
are induced to market line extensions and fast-follower copies with lile real 
functional difference because the economic results will subsidize research into 
innovative but less frequently found compounds. Choosing the segmentation 
method by looking for the best fit to the market assists business development 
in its understanding of the opportunity. It will also help to identify the issues 
that must be overcome to be successful in clinical development and then 
marketing. Business plans for products must consistently survive the tests of 
being Achievable and Realistic to be worth pursuing. 
The antibiotic markets are a wonderful example of segmentation at work. 
The functions of an antibiotic are well defined by the bacteria they kill and these 
themselves are sub-divided by their own characteristics, such as pathogenicity, 
aerobic or anaerobic respiration, susceptibility to antibiotic types and so on. 
Products in development today are selected for their segmental and crosssegmental 
functions which are known to confer value in the marketplace. The 
design of the clinical trials made to demonstrate their functions are an exquisite 
expression of the use of market segmentation driving drug development. 
This brings us to the question of how to look for a product opportunity in 
business development and in particular where to start. This will necessarily 
also be partly a function of company history, aer all it is rare to be given a 
completely blank sheet to build a business. 
An internal review is thus advisable although this should be conducted in 
the knowledge that it ought not to exclude consideration of new product areas, 
it is just that the relative araction of some areas will become a higher when 

there is a harmony between internal resources and the product opportunity. 
The key parameters they should be considering are: 
Size: geographic scope; development capacity; marketing capacity; 
funding capacity. 
History: management experience; culture; portfolio; growth; 
ambition; product differentiation. 
Ownership: public; private; venture-capital funded; family. 
In the selection of a menu for a meal, the choice of courses will each have a 
bearing upon the other and moreover on the choice of wine. So if the company 
is family owned and funded, and has a management with narrow experience 
as well as a low history of growth, we see that there is already a paern which 
suggests that highly innovative biological products with a need for extensive 
investment in manufacturing and broad scale clinical development will not be 
aractive to that company. In big pharma, however, while anything could be 
considered, the preference is unlikely to be for niche products with only local 
market opportunities. 
The internal review therefore sets out the ballpark in which the most likely 
candidate aributes can be broadly defined. Once again while there should 
be no absolute barrier to innovation it will nevertheless be tempered by the 
broader constraints. The thing that needs to be derived is a ‘perfect product 
profile’ to suit each of the needs of the company. Although the chances of 
matching this ideal in the market are extremely small, without a clear idea of 
the actual need, an evaluation of the multitude of available products becomes 
much harder. The more the profile of the product can be made objective in 
its view, the more exacting the analysis of the search results becomes. I have 
called this view of the perfect profile an ‘opportunity anatomy’ as it serves 
to describe all the aributes of the desired products from an internal and 
external perspective and describes the relationship between the factors which 
will make the opportunity work in the context of the company, together with 
its portfolio and the marketplace in which it operates. The method is not 
complex but the degree of sophistication brought to the thinking in the model 
which it creates will be highly instructive at the later stages of a transaction, 
as it can set the level of desire and therefore gives some idea of the value 
of a product which matches the perfect profile. By distinction it assists in 
the valuation of the products which come close but are not perfect. Another 
useful feature is that it also helps management decision-making through an 
assessment of their tolerance for deviations from the ideal. 

Internal landscape 
Each company size will be relative to the opportunity and must be taken 
in the context of the other aributes yet when considered in isolation a 
small company can only have limited ambitions in pharmaceutical terms. A 
blockbuster launch is beyond the ability of a small company unless they have 
a large partner. Medium-sized companies probably have the greatest potential 
for growth in that they have enough resources and the ability to raise funds 
for quite sizeable product developments with the capacity to convert much of 
the opportunity into revenues for themselves without having to share with a 
partner or partners. 
Large companies have a different burden, because generating growth from 
a large base is much more difficult. Products in this context cannot become 
aractive until they are able to generate sums in the hundreds of millions 
or greater per year in sales. Below a critical size in each company the use 
Figure 3.9 Opportunity aributes 
Internal landscape Market Product Attributes Weighting 
Size Size IP + to +++++ 
Geography Growth Preclinical package 
Segmentation History 
Marketing Competition Stage 
Funding Development 
Portfolio fit in 
Customers Prescriber focus Portfolio fit in the 
Growth Patient turnover Results 
Ambition Seasonality Regulatory pathway 
Cost of goods

of resources needed to develop a small product becomes uneconomic, as 
the returns cannot match those used to develop a successful large product. 
Consequently the partial development of a product which then fails to fulfil its 
potential for some reason, such as label restrictions, becomes an opportunity for 
smaller companies with a different economic scale and, as a result, the product 
becomes the object of out-licensing. 
Being a local player in pharmaceuticals markets can carry either a penalty or 
an advantage. Larger products are most oen licensed to companies who can 
provide extensive reach, worldwide by preference. The licensor has a much 
lower management risk through having fewer licensees and will benefits from 
a continuity of support. Conversely a local player may have preferential access 
to particular markets in a particular geography which will improve its profile 
as a partner. 
Assuming that the company has an internal development capacity as several 
companies outsource this function, there will be a preference for those areas 
where staff have experience and expertise. Clinical development is a costly 
exercise and most companies will do well to extend their range only gradually, 
building on their core competencies. Even where a development team can be 
acquired with a product, know-how and insight are not easily handed on during 
the technology transfer period. Alongside the experience there may also be the 
physical capacity issues – say, if activities must be carried on offsite, problems 
in oversight and management can occur and so jeopardize the development 
programme. The standards of documentation, operating procedures and 
compatibility with the regulatory function within a company will all have a 
bearing on the aractiveness of an opportunity. 
The ability of an organization to acquire and develop a product does not 
automatically imply that when it is brought to market it will be necessarily be 
a success. The company’s capacity to commercialize the product needs to start 
well before launch and will involve teams in the design of the clinical support 
studies leading up to the launch and beyond, including the introduction of the 
product to opinion leaders and through them to centres of excellence. These 
activities need to be continued with labelling support studies to elaborate and 
substantiate the claims that can be made for the product. It is from these that 
the product positioning statements can be evolved for the marketing campaign 

and the materials to support the sales teams across the various countries, 
cultures and languages where the products will be marketed. The marketing 
capacity therefore needs to encompass the regulatory negotiators, the medical 
marketing function, the brand management team and the country-specific 
product managers and sales directors. Also of importance is the logistics 
management in the supply chain to ensure that the product is produced, 
packaged and delivered to across the globe with properly prepared package 
inserts and that SPCs (Specification of Product Characteristics), quality analysis 
releases and the reimbursement approvals are in place. Also required will be 
the product identification procedures, pharmacovigilance programmes and 
safety reporting database communications. 
Depending on the situation of the company the ability to fund a transaction 
may come from one or more sources. Young companies might seek funding 
from private sources, from banks, government loans, or venture capital. Only 
rarely will small companies have significant reserves or income with which 
to fund development activities of acquired companies. In the middle range of 
companies where there is some history of trading it may be that there are some 
retained earnings which may be used for business development. It is oen the 
case in family-owned companies that growth will be funded from retained 
profits. In publicly traded companies the retention of too much cash in the 
business can expose a company to the risk of takeover hence it is quite common 
to see such reserves being used to secure leverage or other debt instruments 
to fund business development. Large companies will have the option to fund 
business development directly from revenue, from reserves or, depending on 
the lending rates at the time, they may use these resources as collateral to secure 
debt either in the form of short-term instruments or perhaps long-term ones, 
such as through bond issues either secured against this collateral or convertible 
into shares in the company when the value of the business development activity 
has been realized and the share price has risen and can then compensate the 
Naturally the most efficient method will be employed to achieve the desired 
result, and it is the capacity of the company to service the funding mechanism 
which will determine the cost of this capital. The lower their capacity the higher 
the risk and cost will be to secure the funding. The risk in the product must 
therefore have a full compensating value to justify the investment. Although 
the pharmaceuticals industry is high risk, it becomes possible to find funds in 
most cases due to the high rewards available for success.

The overall funding requirement therefore needs to take into account the 
cost of the acquisition, the development costs, the marketing costs and the cost 
of capital. Only if the whole equation works and yields a positive result which 
includes all these elements will management be able to make a judgement on 
the suitability of the investment for the company. In structuring transactions 
therefore it is extremely common to see the initial exposure, the upfront costs, 
a licence or an acquisition deferred as much as possible to reduce the risk in the 
transaction for the acquiring company and its shareholders. Funding capacity 
thus oen becomes one of the main constraints of deal selection in business 
Generally managements are hired and paid according to their experience. It 
is their insight, born of making and surviving mistakes, which informs their 
next decision. This can of course lead to problems for if a management has 
succeeded in the past only through a cautious approach, or equally, if nothing 
has ever gone seriously wrong, the capacity of the management to make 
bold enough decisions may be impaired as adversity is a great teacher and 
stimulator of innovation. As the saying goes ‘necessity is the mother of all 
invention’. Even so each management style will have its strengths. Because 
business development is required to be innovative and so a lile iconoclastic 
in its approach, in dealing with a cautious management it is usually best to 
remember another old saying: ‘The boss may not always be right but he’s always 
the boss.’ As a result business development has to understand the experience 
base of the management in the company and so its preferences when seeking 
opportunities. This understanding should also be extended to adopting the 
style and even the ‘spin’ when proposing them. Management’s experience can 
sometimes be somewhat narrow leading to difficulties in communicating the 
potential of an opportunity. It is frequently the case that business development 
has the problem of finding good opportunities and presenting them only to 
have the opportunity rejected because the management ‘couldn’t see it’, which 
is frustrating and wasteful. Among my own experiences some proposals 
succeeded and some did not; those opportunities were lost purely because my 
audience didn’t get the point I was trying to make. The reasons for this were most 
oen that the chance to present the opportunity came at the wrong moment. 
CEOs are typically extremely busy so, since you may be thrust into the limelight 
in an elevator or on a flight, the ability to ‘pitch’ your project rapidly and well 
can be a useful skill. Included in the opportunity anatomy therefore is the need 
to understand the psychology and mentality of the company’s management 
and where the ‘hot buons’ are; meaning that the business development group 

must be intimate with management on a daily basis to keep abreast of any 
changes in mood or priority. Knowing this can avoid much wasted effort in 
pursuing propositions which will not be aractive later. 
When seeking the criteria for a transaction business development also needs 
to be mindful of the customer base of the company. Unless the company is 
extremely diversified some areas will always be a poor fit. Certain specialty 
areas are clearly not for the generalist; for example women’s health, in vitro 
fertilization and contraception are served by specialists in medicine who 
require specialist knowledge and support from of their product suppliers. 
In the medical device markets, surgical devices for use in internal medicine 
do not sit comfortably with the osteology products such a spinal implants. 
Dermatology, gastrointestinal medicine, cardiology, neurology, to name some 
of the areas of hospital medicine which have highly technical requirements, 
require an equivalent specialization from the personnel in the company to 
match their needs. The intricacies of each sector demand a focused group with 
complementary skills in product development and understanding of market 
dynamics like patient management, reimbursement and specialist diagnostic 
requirements. By contrast primary care requires a breadth of knowledge 
which can address the needs of a practitioner who must make a preliminary 
diagnosis and initial treatment or the decision to make a referral for specialist 
intervention. This needs a different approach and, in selling medicines, through 
the provision of sufficient evidence to support initial use of a product. 
Alongside these are specialty areas such as the provision of vaccines at local 
level or negotiating for government contracts (a market with opportunities and 
constraints which are very different to either those of the hospital or those of 
primary care therapeutic markets). Hence the compatibility of an opportunity 
with the business of the company, defined as its customers, is an issue of crucial 
importance in seing up the parameters for a desirable product. 
There are a number of aspects to growth which must be considered in the 
backdrop to a product profile. If your company is in a rapid growth phase, 
the addition of a management intensive product will be more of a challenge 
than that of a more ‘standard’ product. Conversely if the company’s growth is 
stagnant the injection of a rapidly growing product or dynamic development 
opportunity can invigorate the whole company. There are major considerations 
surrounding growth which are affected by the management and financial aspects 

discussed above. There may also be the development capacity constraints that 
might follow the acquisition of a major programme, especially if this were a 
smaller company. Runaway growth can be dangerous to any company and is 
oen referred to as ‘over-trading’ in the sense that the company cannot service 
the market opportunity either physically, in that it cannot produce enough stock, 
or financially, when it cannot fund either manufacturing or development from 
its revenues. On the other hand, starving an existing business to fund a new 
opportunity also has its downsides. As a result it is wise to consider the impact 
of a product in the context of the company’s existing growth and what effect 
there might be from the product’s growth and its requirement for resources 
as a consequence. These elements will help to profile likely candidates in the 
evolution of this process. 
The ambition of the management and investors, where this is different, has 
also to be taken into consideration which will be borne out of the history of the 
company, the expectations of the shareholders and investors and the personality 
of the individuals involved. Where there is significant bias toward science 
and medicine the ambition of the company is oen driven towards growth in 
order to fund the research and development needs of the products. This can 
be a powerful motivator. Where, however, an individual and their team are 
motivated more towards using the company to generate value, measured in 
financial terms or perhaps as the means to express personal power through 
capital, then a different ethos will take hold. It is true to say that this only refers 
to the dominant motive; the majority of business people in pharmaceuticals are 
very much concerned with the delivery of higher-quality medicines and the 
advancement of science and accept that to achieve this they must make use of 
considerable capital resources. There has, however, been a recent trend towards 
growth through acquisition and the development of the specialty pharmaceutical 
sector has shown that a more business-like approach can be a successful means 
to both the creation of new medicines and a spectacular generator of shareholder 
value and personal wealth. Excellent examples of success in generating this 
kind of growth are Shire Pharmaceuticals and Reliant Pharmaceuticals. In 
creating the business development response to a management’s ambition it is 
therefore important to bring the dimension of ambition into play as it will have 
a significant bearing on the valuation process and approaches to negotiation. 
The business-dominated approach may be more likely to look at an asset for 
its tradeable value in the medium term rather than its long-term medicinal 
value, particularly if the company has been funded by venture capital or a buyout 
fund. Hence in these situations a more adventurous proposal may be well 

received. More cautious managements frequently require that a greater depth 
of analysis and due diligence be conducted before considering and commiing 
to a transaction. This is not to say that both approaches do not have their merits 
and successes, but for business development the mindset of the management 
will remain a major influencing factor. 
Product differentiation can at times mean the opportunity to diversify risk in 
a company or alternatively may be a strategic foray into new and uncharted 
territory where competition is low or absent. For many organizations ‘sticking 
to their kniing’, as the saying goes, is an important expression of focus and 
effective utilization of resources. The balance to be struck between these two 
views depends on the interplay between many of the other factors mentioned 
previously and must be judged according to the ambient circumstances and 
the future position the company wishes to achieve. The strategic and tactical 
differences between the existing portfolio and the new products will need 
to remain consistent with the need to grow and the capacity of the current 
markets to provide the opportunity for that growth. If the company is in a big 
market but severely hampered by competition it may be extremely useful for 
it to enter some smaller and less competitive niche markets to bolster growth. 
Alternatively if steady exploitation of an expanding market share is providing 
good growth, the wise and fruitful course may well be through developing 
the franchise through line extensions and complementary products. Evaluation 
of the impact of a business development opportunity on the overall shape of 
the portfolio is required to ensure harmony and best use of assets to achieve 
Whether the company has public or private status can have a significant 
bearing on the evaluation of the business development opportunity. When 
value, price, economic impact, portfolio fit and strategic intent of the company 
are on public show and analysts from many different investors are making 
their own assessments of the wisdom, or otherwise, of a transaction many more 
questions must be addressed and answered than in privately held companies. 
This is especially true if the majority shareholders are also active in the board 
of the company. The argumentation offered by business development on behalf 
of a project to management in a public company must satisfy a full corporate 
decision-making and governance process; an individual owner, with no one 
else to answer to, can be as idiosyncratic as they please up to a point. Although 
this seems a simplistic view there have been a good many European companies 

where until recently individuals or family groups still controlled the final 
decision. This model has since reduced in significance since several families 
have sold their stakes in their companies as the industry consolidates. 
Venture-backed companies form a distinct group within privately held 
companies, with different agendas. Here individuals representing venture 
firms hold board seats and can bring considerable influence to bear on a board’s 
decisions about business development issues. They are principally concerned, 
however, with their own portfolios and sometimes this takes priority for them 
over the interests of the company, with negative results. Over the last decade 
in both investing and consulting I have observed decisions taken to in-license 
or out-license products based not, as it should be, on the best outcome for 
the company but on the willingness or ability of a venture fund to provide 
more money for the transaction. If the transaction requires additional funding 
commitments which would overly concentrate the venture fund’s portfolio of 
investments in one company or if it would result in the need to bring in further 
investors, and would thus dilute the venture fund’s share of the equity in the 
company, reducing their influence on the board and control of the investment, 
the fund may veto it. The status of the company’s shareholding will thus have 
a major structural impact on any transaction because of the downstream effects 
of financing the operations of the product aerwards. 
This last part in the evaluation of the internal landscape demands that 
each business development transaction must be approached in the context of 
all these influences for the given situation. The transaction must be chosen to 
suit the internal and external landscapes and be presented to appeal to the 
influencers and decision-makers and deliver value in a way which enhances 
the company’s future across all these dimensions. 
External landscape 
When selecting the market or markets to search for opportunities, several 
determinants of the choice will thus be prescribed by the internal constraints. 
The features which will be under this influence include the size and growth of 
the market. A vast market may superficially look like a great opportunity, yet 
if its growth is stagnant it will pose a major promotional challenge. A rapidly 
growing market may equally look aractive on the outside but might be the 
subject of rapid technical evolution, with short product life cycles and quick 
substitution; it would therefore offer a cash flow of only limited duration and 
a company would need to recoup development costs very rapidly in order 
to show a profit. This laer market type is oen seen in medical devices and 

diagnostic products where technical innovation can speed ahead and is oen 
combined with shorter regulatory approval times than pharmaceuticals so 
reducing barriers to market entry and encouraging fierce competition. New 
product adoption can thus change the market much more rapidly than would 
normally be the case in pharmaceutical markets. Indeed the need for rapid deal 
evaluation is increasing throughout the health care industry as competition for 
product opportunities hots up. Gone are the days when a big pharmaceutical 
company could take 9 months or a year to evaluate a licensing opportunity; 
the need now is to evaluate at speed, which requires appropriate tools to 
discriminate between opportunities. An interesting example of extreme product 
life cycle compression is the snack sector, where new product developments 
may only be given a maximum of 6 weeks to succeed or be withdrawn. 
Innovative products are tested in small areas and a managed through in-store 
promotions and local advertising to see if the product has consumer potential 
or not during that short period of time. Intensive market research is carried out 
to establish if the product has consumer potential but the ultimate determinant 
is off-shelf movement. If this does not develop the product is dropped. 
While such development and marketing cycles are unheard of in biotech 
and pharmaceutical markets because of the technical and regulatory hurdles 
involved, the thinking which goes into the pursuit of a business transaction 
in health-care needs to incorporate some of the same characteristics in order 
to be effective and competitive. The long drawn out testing of samples in the 
laboratory or in animal models slows the business development process as too 
few projects can be evaluated. As more data are generated, decision-making 
can become blurred if the discriminating characteristics identified as satisfying 
the market in the first place are not adhered to. 
Apart from questions of size and growth, the ability to segment a market 
to assist market penetration may be a positive aspect. However, if there is 
fragmentation not segmentation this could become a barrier to market share 
growth (‘fragmentation’ describes small unconnected and uneconomic groups 
and ‘segmentation’ seeks to create groupings which are large enough to merit 
investments in product development and marketing). However, some diseases 
are intrinsically too small to be economically aractive for drug development. 
This has led to the provision of special support for small patient groups in socalled 
‘orphan indications’ where the numbers of patients are few yet the cost 
of product development remains high. Except where such support exists there 
is lile incentive to invest which is why a segmentation exercise is so valuable 
in evaluating a product opportunity.

The competitors in a market must also be stringently assessed for their size, 
strength, reputation, aggression and number. A market may have a single 
dominant player or it may be shared among many players of different sizes. 
The competitive nature of the market is a good indicator of the cost of entry 
and the cost of maintaining market share, and these costs will have an impact 
on the market’s araction. The history of competition in a market is oen 
overlooked in this assessment and its effect on the evolution of the market 
should be noted. Due account should also be taken of technical innovations. A 
number of additional factors need to be considered as aspects of competition: 
chief amongst which are patient turnover and responsiveness to promotion. 
Patient turnover 
Patient turnover is critical to effective competition. An excellent case in point 
was the angina market in the UK in the 1980s. Many new products were being 
launched and were expanding the market’s value considerably. The older 
glyceryltrinitrate products and other coronary vasodilators were giving way 
to new long-acting forms such as the isosorbide dinitrate and mononitrate and 
these were being augmented by the introduction of newer coronary vasodilators 
such as calcium channel blockers. At that time my task was to introduce one 
of these calcium channel blockers to the market. The launch, which was late 
due to regulatory delays, firstly had to contend with the dominant competitor, 
nifedipine, and secondly a cheaper and oen generically available group of 
products based on verapamil. Aer the early stages of the launch were over 
my team were perplexed to find that, despite a good reception and enthusiasm 
amongst doctors in the key prescribing group for our product, sales were 
sluggish. Aer some market research and analysis it became clear that it was not 
the selling and promotion of this or the size of the market that was holding back 
growth: it was the rate at which the patients had their prescriptions reviewed 
and changed. We were promoting the product well in hospitals and in primary 
care but were achieving steady but only linear growth. The prescribing paern 
showed that patients would be reviewed by their physicians every 3 months 
and, of these a certain percentage would be changed to a new product. This 
would not be done in primary care: the patient would be sent to the local 
hospital to be evaluated and switched to a new product. The market research 
revealed that each hospital doctor was changing 1.84 patients per month on 
average and when multiplied by the total number of doctors in hospitals this 
exactly matched the rate of our new prescriptions. In order to penetrate the 
market faster we had to accelerate the rate of patient turnover, which is what 
we did: we promoted the need for primary care practices to call in patients 

with a poor history of success or compliance and refer them on to the hospitals. 
The competition in this case was less other companies’ promotion than the 
structural resistance of the market to change. 
Responsiveness to promotion 
This is the other aspect of competition. It is illustrated in part by the previous 
example. It is also heavily affected by the technical complexity of the product. 
Simple products for trivial illnesses are changed frequently by the doctor when 
they are given high enough levels of effective promotion as the consequences of 
a change are not likely to be significant. Technical products do not respond to 
promotional weight alone, however. Technical products require a much greater 
body of evidence to satisfy the burden of proof a doctor will demand before 
they adopt a product, because an ill-informed choice of a drug used in for 
instance the treatment of heart disease could be fatal. The approach required 
in promoting technical products needs to be one that respects the particular 
requirements of that specific market and tailors the provision of information to 
the audience. Each physician will need to see that comprehensive testing and 
evaluation by reputable colleagues has been performed before placing sufficient 
trust in a product to risk relying on its effectiveness on behalf of a patient. 
In highly technical markets there tends to be a concentration of prescribing 
doctors who are specialists in particular areas. The more exotic the disease the 
more likely it is that only a few physicians will have gained the knowledge and 
the experience to treat patients successfully. From the business development 
perspective this can offer a market with a much reduced cost of promotion and 
so may be accessible to smaller, and sometimes newer, companies. Depending 
on the value of the disease to the patient and their families this is this can also 
mean that the rewards of supplying smaller sectors can be high. One only has 
to think of in-vitro fertilization, and treatments for single-gene or enzymedependent 
disorders such as cystic fibrosis, Fabry’s and Gaucher’s diseases, 
to see examples of small patient numbers generating considerable value to 
companies of moderate size. 
Another factor to be considered in selecting a market as a suitable target 
for promotion is its stage of development, as the competitive aspects will vary 
considerably between stages. Markets can be in several different states beyond 
big and small, growing or declining. The new market with few products and a 
lower level of functional satisfaction can be wide open to novel technical solutions. 
Bigger markets naturally require the more educational and promotional cost 
yet the classic example of H2 antagonists leading on to the adoption of proton 
pump inhibitors is economic incentive enough to justify these expenses. This was 
described in part above in the example of Zantac, the H2 blocker, and Prilosec, 

the proton pump inhibitor, as they fought for dominance of the prescription 
market in the USA. The market evolved from antacids to Tagamet, the first of 
the H2 blockers; this was supplanted by Prilosec and subsequent proton pump 
inhibitors, and its successful conversion to non-prescription status has generated 
and maintains a multi-billion-dollar treatment franchise. The inadequacy of 
antacids in the face of peptic and duodenal ulceration and gastrointestinal (GI) 
inflammation was clear in the marketplace and the reduction in the incidence 
of ulceration and GI inflammation is a testament to the effectiveness of the 
new agents which have been adopted first as prescription products and then 
as over the counter (OTC) products by doctors and patients alike. Yet ‘price 
efficient’ markets where there has been no technical innovation and so where 
generic price levels abound have deterred innovation for many years in a 
number of cases. The cystitis and urinary incontinence markets are just two 
examples where patients have not benefited from any truly major technical 
advances for many years. Product introductions into markets of this kind have 
very different characteristics to novel product introductions into ‘technical’ or 
‘trivial’ markets. When a technically superior product to treat foot infections, 
which could justify a premium price, was released, the dormant market for 
systemic antifungals responded to this innovation, research into the area was 
revived and competition was stimulated. 
A final major influence which must be considered in market selection 
is seasonality. Especially in a portfolio context this can either be the perfect 
justification for a product or the opposite. Seasonal products are highly 
demanding of resources at particular times of the year and this places heavy 
demands on production, on sales and on supply chain support, one aer the 
other. In a normal portfolio to have one such product can be highly disruptive 
because of the variable effects on inventory holdings, selling time and cash flow 
requirements. In an ideal situation a company would have a matched ‘pair’ of 
cyclical portfolio products (winter/summer) to counterbalance each other with 
the production and sales seasons neatly dovetailed one into the other. Sadly 
this is not easily achieved but in product acquisitions seasonal considerations 
should be thought about in relation to infections, allergies, vaccines and 
seasonal migrations at holiday times. 
Intellectual property 
The most frequently considered product aributes are technical or qualitative in 
nature; however, there are also issues such as Intellectual Property Rights (IPR 
– or more oen just IP) where its quantity must also be matched or exceeded 
by its quality. A patent must not only be in existence, it must be wrien in such 

a form as to be enforceable and defensible. Fundamentally the IP of a company 
is actually the asset of principle value as it protects the premium for the patent 
holder or the licensee over other providers. The depth and breadth of the 
individual patents and the patent estate confer the duration and durability of 
the cash flows that the products can generate. Yet if the language used to frame 
the claims is too loose or too tight, or the claims made are too broadly defined, 
the value can be diluted by challenges and even by being overturned. All it 
takes for a patent to be invalidated is the existence of prior art or the failure to 
adequately demonstrate an inventive step – this can undermine or negate years 
of work and investment. So if the definition of the product is to be aractive 
for a business development transaction the strength and length of the patent is 
crucial for success. 
Alongside the IP claims the preclinical package of a product is a major asset or 
drawback depending on the quality of the work done and the documentation 
surrounding it. Solid laboratory work and laboratory notes are required to 
underpin later submissions and the package needs to address all issues that 
have been raised as concerns about the compound family before, as well as 
establishing novel features about the product which will set it apart from 
competitors at later stages of development. The biological and chemical data 
are fundamental to the formulation and development of a compound into a 
medicine of value to patients and companies. The evaluation also has to address 
the history of a compound depending on the stage of development. Questions 
of whether a proof of concept has been established in animal models and then 
validated in man will be enhanced by a clear understanding of the mode of 
action of the drug from an established scientific model. 
In establishing the desired stage of development for compounds the portfolio 
needs to be clearly understood as there is oen a desire to have a balanced 
portfolio from the point of view of clinical phase. But what does a balanced 
portfolio look like? 
The differences between a product for pain and a product for arthritis is 
measured in years and millions invested. If a company has many projects at 
an early stage of development it is clear that there will be a long time before 
these will generate income. However, a ‘late stage’ compound in phase IIb, 
where safety is being assessed, may still have several years of expensive clinical 
trials to complete before filing for registration and approval can be made. In 

cardiovascular trials, in particular heart failure and other chronic conditions, 
a large number of patients are required to demonstrate effectiveness and the 
duration of each patient’s therapy plus the time for the required follow-up 
examinations and the analysis of data all take many years. In considering the 
kind of products to be sought one must consider the cost burden, financing 
and scientific risks in the plan. The criteria set by and for business development 
in searching for appropriate candidates need therefore to have a strong 
If the criteria are well understood before discussions with another company 
are embarked upon, this can save a deal of time and effort. From a personal 
point of view there is nothing more annoying than to be engaged in a process 
with a prospective partner who does not have a clear understanding of their 
own needs. They don’t know when to say yes and don’t know when to say no. 
As a result discussions can drag on for months with no way of resolving the 
engagement until either one side or the other makes an executive decision to 
summarily halt discussions. It is beer to know that a product or project will 
fail the screen early and move on to a beer project. 
The development stage and its implications are one aspect of product 
selection. Another is the marketing environment required to capitalize on 
the investment in development. There are a number of dimensions to this, 
including the current marketed portfolio and the company’s reliance on this 
income for operating profits both at the time of launch and beyond. The 
current therapeutic focus of the company before launching into a new area will 
be more or less compatible with the requirements of the new product. It will 
determine the need for any internal reorganization or addition of resources 
and training to become prepared for the launch. Moreover the sheer cost of 
a competitive launch may require considerable additional finance which may 
bring resource constraints to other parts of the company. Although there are 
ways of optimizing each of these factors, such as leveraging more finance or 
partnering through co-promotion, there are many different ways of resolving 
a less than ideal situation which by negotiation may be decisive in the choice 
to pursue one business development opportunity over another. Even so it is 
a brave management that will choose to finance a radical change in portfolio 
direction without strong reserves or no viable alternatives. Depending on the 
scale of such a reorganization or refinancing, a number of alternatives may 
have to be considered to balance company resources and accommodate such a 
launch. These might include borrowing significant funds in the short term until 
the launch costs have been recouped or seing up a co-promotion partnership 
to share the costs, but with the proviso that the profits must also be shared. The 

choice of one business development opportunity over another will thus need 
to take the funding and resource requirements into consideration and where 
major structural changes would be required to achieve success this could tip 
the balance in favour of one opportunity over another, depending on the views 
of the management and of the investors. Although a radical change in the 
business model, perhaps through an acquisition, might be aractive from one 
point of view it would be unusual for investors to take such a risk without the 
prospect of considerable rewards. 
One of the critical features of a product is its differentiation from others 
in the market. It has long been my belief that successful products have to 
have some truly differentiating feature if they are to have a good chance in 
the market. There is an inherent problem in the market in that the costs and 
uncertainties of drug development can lead to a number of similar products 
being developed simultaneously and, if they all succeed, the result will be many 
poorly differentiated products coming to market not because they are needed 
but because, if the development has not failed, the costs must be recouped to 
whatever degree is possible. The process of choosing a product which will have 
a differentiated profile will be dealt with later but, no maer how it is achieved, 
it is a crucial element. 
When addressing this issue the differentiation should be of a functional 
rather than a theoretical nature. By this I mean that achieving a clinical result 
merely by a more sophisticated means actually has lile value. Much has 
been wrien for instance about the differentiation between celecoxib (a COX2 
inhibitor) versus naproxen. Both products’ protagonists have put forward 
arguments to support the theoretical advantages of each product in its effects on 
stomach and heart issues. However, only if the practical benefits can be seen by 
patients and physicians will they translate into market share notwithstanding 
any weight of promotional expenditure. I was involved with the area of 
ulcer treatments in the UK in the lead-up to the launch of omeprazole in the 
1980s and saw that no maer what else the Glaxo team tried as a defence for 
ranitidine, the speed of onset of symptomatic relief of omeprazole could not be 
denied. Surely and steadily the market moved to proton-pump inhibitors such 
as omeprazole, not for theoretical reasons but because its effect was tangibly 
faster and so beer for the patient. 
An issue which may seem an obvious qualification for selection for portfolio is 
the clinical results that the product has demonstrated to date in its development. 
Despite even dramatic clinical evidence in anecdotal studies it is sometimes 
difficult to establish the worth of a product without strong comparative clinical 

evidence and this has to be established in a manner which will be accepted by the 
regulatory authorities and furthermore can be replicated in a real-world clinical 
seing. Poorly controlled studies including poorly performed statistical analysis 
or confounding factors can negate even a very promising drug candidate’s 
aractions. The potential of social factors influencing the drug’s acceptability to 
patients, of unforeseen drug interactions, of selective analysis, of data omissions 
or of recruitment errors in clinical studies have all cropped up as reasons in due 
diligence for rejecting products for in-licensing and investment. 
In combination with the need to demonstrate differentiation, providing 
substantial proof is paramount. A clear example of such a breakdown in 
development occurred aer we had taken a product through to very late-stage 
licensing discussions. The product was a chemical castrator, and it had a sound 
mode of action and encouraging preclinical and clinical results. The differentiating 
feature of this product was claimed to be a complete lack of ‘hot flashes’ suffered by 
patients through suppression of testosterone production: this was the drawback 
of the multi-billion dollar market leader. Yet despite the drug’s mode of action 
theoretically not permiing the ‘hot flashes’ to occur, as the studies progressed 
unexplained ‘flash’ occurrences happened to patients on the active substance. 
With the first hot flash report, our product profile was destroyed. All we had 
was a similar drug to the market leader with a lower frequency of adverse events 
– not a real functional advantage, certainly not enough to support the premium 
price which would be required to pay for the development and marketing costs. 
As already suggested by the issues raised about the regulatory pathway, 
the pathway itself needs to be clearly defined. In investing in early-stage 
products it is not always easy to see the hurdles that will be placed in front of 
the products by regulatory agencies and their advisors. It is, however, possible 
to see what has been done before and estimate the likely impact of unanswered 
questions on the time to approval for a product. Clearly the most difficult path 
is the one which has not been trodden before. On more than one occasion I’ve 
been involved with projects where the regulators themselves have not had a 
precedent for an approval path. In one of these cases the product had been 
proposed as a means to avoid complications of surgery called ‘post-operative 
adhesions’. However, there are still no reasonable statistics available on the 
incidence of these complications. Despite many specialists and surgeons 
acknowledging the seriousness of these adhesions the root cause they gave in 
interviews was these were always a result of ‘poor technique’ and of course the 
specialists ‘never saw’ this in their own practice. As a result the company had 
to propose a means to measure the success of their products against a ‘ghost’ 
problem. The study design they were forced to adopt required follow-up 

surgery to confirm the incidence of the complication. The number of volunteers 
to undergo a second procedure was, not surprisingly, very low and the study 
timeline extended way beyond the original estimates. The eventual approval 
of the product in the US came 5 years aer the study was proposed and that 
despite the product being on the market in the EU all that time. Needless to 
say, the economics of the products were unrecognizable when compared to the 
original plan. 
Another ra of issues which must be reflected in the screening process 
exists in the manufacturing base. These may be technical or environmental in 
nature or could be caused by constraints on resources. If there is insufficient 
internal capacity it may be necessary to outsource the manufacture of some or 
all of the required components. Few companies now manufacture their own 
active product ingredient (API ) and many will incorporate delivery devices 
sourced and invented externally. Outsourcing has become one of the keys to 
profit in manufacturing. But with outsourcing comes the need for extensive due 
diligence in deal-making as the manufacturing standards, contracts and financial 
security of every component manufacturer must be aended to during the dealmaking 
process. As well as the regulatory qualification of the manufacturing 
site, the need for visits by FDA and EMEA inspectors can occasionally prove 
to be problematic. This was the case for a client whose manufacturing site was 
in Israel during one of the recent crises. The FDA inspectors were embargoed 
by the Agency from visiting a designated war zone. Without inspection the site 
could not be approved and, lacking approval, all the test batches required for 
the marketing authorization could not be submied. This put pressure on the 
company as they could neither launch the product nor use the batches, which 
were perishable and so went out of date waiting for inspection. 
Manufacturing has very well-defined project planning and the vagaries of 
politics and regulations can severely affect the timelines and cost. So if the final 
synthetic pathway is not established or the API sourcing comes from distant 
lands it may be beer to choose another opportunity. 
The final item in the screening test is the cost of goods (CoGs). Naturally 
everything we have previously discussed will have a marked effect on the CoGs 
but as an independent variable it is a pivotal issue in deciding for or against 
a product. Optimization of synthesis can reduce the CoGs to some extent but 
this needs to be balanced against the capital cost of any new plant required for 
a new synthesis, or the introduction of new machinery for formulation work 
or even packaging. Furthermore all of these will require regulatory approval 

at each step of the way and be subject to the approval process timelines which 
typically are 60- or 90-day review times even if there are no questions. 
Another example of the vagaries of manufacturing occurred when reviewing 
the cost of goods of a new formulation of capsules during the final review it 
came to light for the first time that the machines required to complete the filling 
would not fit the building on the chosen manufacturing site. The machines 
were too tall for the ground floor and too heavy for the upper floors and so 
required a new facility to be built solely for this product which reduced the 
operating margin by several per cent until the costs could be wrien down. 
Exotic methods of production with untried and so not previously approved 
pathways have many issues depending on the risk tolerance of the company, its 
investors or the management proposing such a product can have a far-reaching 
effect on the fate of the company. Search criteria therefore need to be tailored 
to the current and future situation of the company and rigorously applied in 
screening opportunities. There are very few right choices but very many wrong 
ones and, at the risk of seeming too exacting, and so passing up what looks like 
a good product, experience has shown that by being hard-headed about these 
criteria at the earliest opportunity many a bullet can be dodged. 

Profiling and Searching 
for Opportunities 
One of the most frequent questions I hear is: ‘Where do you find your 
opportunities?’ Truthfully the answer to this question can be less systematically 
applied than can that to many others. The increasing sophistication of the 
licensing and business development communities across the globe are still not a 
total solution for any or all companies. The existence of licensing and partnering 
conferences, websites and journals, together with specialized agencies acting as 
clearing houses and the technology transfer offices of the major universities 
and hospitals, have increased the number of opportunities available; but in 
some ways this proliferation clouds the view rather than helping. There is no 
standard method of presentation or equality of knowledge about where, when 
and how to make an opportunity available, or indeed any common purpose in 
seeking a partner. The range of opportunities is extremely broad, varying from 
product ideas to marketed products and from novel drug targets to complex 
devices and technologies to enhance the practice of medicine. Patents may 
range from covering a surgical procedure to the invention of a new chemical 
compound, and on to a gene, to the design of a device or, the soware that 
runs it. All of these can be found if you know where to look and what your 
need may be: a strategy is needed to reduce wasted effort and to find suitable 
There are two basic landscapes to investigate when conducting a search, 
the first is the internal – who and what do we know already? – and the second 
is external. The former is quite oen overlooked in the search process by 
business development departments and most frequently comes to light when 
an internal review team is asked to assess an opportunity and someone says, 
‘Oh but I did this 5 years ago’ or, ‘You should’ve talked to ‘X’ about it – she’s 
been working on this for years.’ As long as the criteria have been properly 
selected and are clear it can be relatively easy to investigate internal sources of 
knowledge in research and development and to follow up their contacts. The 
more oen this is tried the more familiar the company’s R&D organization will 
become with thinking proactively about new opportunities and, incidentally, 

it may also become more objective about rejection of a project. Internal R&D 
personnel sources are apt to judge opportunities primarily on their scientific 
aractions so it is a good idea to explain the business criteria before asking for 
suggestions to avoid the creation of a champion for a lost cause and with it the 
problems this brings. From experience, however, brainstorming sessions with 
senior scientists looking for ideas on whom to contact makes good use of their 
in-depth knowledge of where the best research is being conducted and which 
groups have innovative ideas. A frequent and open dialogue between business 
development and the research function makes good use of this major resource 
and if handled tactfully encourages scientists to participate in the creative side 
of the business in an informative way. However, there is always the potential 
for this to take on the appearance of a commiee in charge of decisions if 
carried too far: the process must remain in the hands of business development 
to maintain portfolio continuity. Informality should, I suggest, be a key element 
of such interactions. 
Scientists are not the only internal sources of information useful to the business 
development person. Others who have a significant knowledge of the industry work 
in patenting, where the competition is constantly monitored for their competitive 
and potentially infringing activities. Manufacturing is also a good source of 
competitive intelligence regarding new techniques such as in formulation and 
delivery devices. Marketing and sales internationally and in affiliate companies 
will also have a perspective on what is happening in the marketplace in that they 
can help to validate what the market wants or believes it wants since they are in 
direct contact with the physicians, technicians and patients. 
The increasing specialization of business development brings with it the 
danger of the function becoming isolated from its peers, and this should be 
guarded against. If business development seeks a special role in the company 
it should be by consensus that this is a required function and not an imposition 
by management. Talk abounds of business development having to ‘sell’ its 
ideas hard to overcome the internal resistance: this speaks of a function which 
has become divorced from the heart of the business. In part this may be a result 
of where business development reports into the organization. Is it the CEO or 
the CFO? Sometimes business development or a part of the function becomes a 
subdivision of R&D which can lead to separate agendas being formed to satisfy 
inward-facing goals. Close coordination is required to get the best from the 
portfolio which must be set at corporate level to maintain focus on the overall 
objective. While the financial function will always come into play in business 
development there is sometimes a question about the motivation of a business 
development function managed from the financial base. My view is that the 

business development role should be generalist and take into account all the 
drivers on the company’s performance. It should be focused on sustainable 
growth and competitive advantage in the first place rather than being led by 
one agenda or another. 
External sources are more varied and difficult to describe simply because of 
the diversity described before. This reinforces the need for clarity in identifying 
the profile of the products or services required to boost growth in the company. 
The variety of product and project sources prompts some aempt to classify each 
as the most likely source of a particular kind of opportunity. So, for instance, if a 
mature product is required the most likely source would be a large pharmaceutical 
company, not overlooking these as a good source of other assets. Conversely, 
universities are a great source of novel programmes but they would have no 
existing products. A loose matrix of opportunities and sources might look like 
the example in Figure 4.1 and suggest the beginnings of a search plan. 
Search database 
In creating a database for a search the source characteristics and the desired product 
profile are natural poles on the matrix axes. Other considerations need then to be 
layered into the search paern. Two such considerations might be geography or 
historical activity. These can be good pointers as to where to search, particularly 
1 2 3 4 5 6 7 
Therapeutic areas 
Figure 4.1 Search plan by segment

when allied to such criteria as strength of intellectual property protection in the 
region or as indicated by publication density of, say, a university in a special area 
of research. However, the steady march of globalization is progressively breaking 
down these barriers and business development executives are now travelling 
well beyond the traditional EU, US and Japanese markets in search of new 
academic and commercial developments. Korea, Latin America, India, China, 
Russia and many other areas are making great strides at all levels of research and 
development through to marketed products and need access to world markets 
through established distribution channels. Also the WTO and TRIPS initiatives 
are beginning to ensure greater aention to the need for high-quality clinical 
work and solid intellectual property (IP) protection. Consequently a search must 
now include a much wider vision of the geographical possibilities than before, 
particularly as developments in biological therapies are being achieved without 
the same degree of reliance on a chemical industry infrastructure for rapid 
developments which previously localized high-quality developments. 
Beyond the institutions of universities and the major research-based 
pharmaceutical companies there are also a very large number of privately 
funded research institutes which have a strong health-care focus particularly 
in medical devices and enabling technologies which can complement drug 
discovery. There are also some individual physicians, chemists or biologists 
who are inventors of potentially valuable assets; these last are the least frequent 
sources of products in pharmaceuticals but can be a useful source of technologies 
and techniques in device inventions and in surgical techniques. 
A new force in health-care development has been the establishment of 
science parks, business parks, ‘technopoles’ and clusters which have been 
funded by national, regional or local government agencies to stimulate the 
local economy. The these are usually centred around one or more universities 
and seek to commercialize the research of the university while retaining some 
value in either the IP of the products and now also the equity in a ‘spin out’ 
company. Governmental sponsors see these parks as an important tool in 
developing economic activity and job creation on a local basis, thus serving 
the needs of their electors and taxpayers. The different agendas of parks’ 
sponsors can sometimes lead to a lack of clarity as to whether the objective of 
the park is primarily commercial or an extension of academic research. The 
park management typically have the responsibility to maintain the focus on 
the commercial side but if the board composition is strongly academic this can 
be a difficult path to maintain. Nevertheless, these parks offer opportunities 
to business development groups as a focus of developing IP and by providing 
central support for out-licensing activities.

The other main players in the establishment of new companies are the 
investors. Venture capital funds in particular have portfolio interests which 
will thrive through the creation of financial or commercial partnerships which 
enhance the value of their shareholdings. As yet there are few central sources 
of information derived from investors but larger funds and some associations 
(EVCA, BIO, EFB) are beginning to make some information available in an 
organized and useful way for business development through the use of websites 
and through sponsorship of partnering meetings. 
A recent addition to the technoparks and investor groups has been 
professional associations such as the network of Pharma Licensing Groups 
(PLGs) and commercial sources such as, and intermediary 
agencies such as Bridgehead, Bionest and others. These agents operate both as 
clearing houses for opportunities and can act as retained search agents working on 
contingency success fees to bring a transaction to fruition. Where such an agency 
has preferred access through personal connections, intermediary relationships 
can expedite a search through privileged knowledge and introductions. 
Search targets 
How then to launch a search for a particular target product? In the first stages 
the process is ideally kept as simple as possible and this should include a 
level of desk research before engaging in personal contact by email or 
telephone. Eliminating the obviously wrong candidates from the search is 
highly desirable early on and these simple methods can assist in that process, 
but may also dismiss some opportunities erroneously if the classification is 
unclear or unwieldy. By use of the product profile which has been derived 
earlier, a list of potential candidates can be built and equally importantly a list 
of candidates that are not ‘qualified’ as suitable and the reasons why this is 
the case. The accumulated data can be recorded in any number of ways from 
simple card indexes to computer database tools. In the case of a distributed 
database, depending on the scale of the company, networked databases 
including R&D and manufacturing and regulatory functions can make their 
search and resources available to the business development group and can 
be most effective. For a small company the centralization of information 
permits rapid searching and facilitates recall of information, while in the 
large organization it should be an easily searched resource by a number of 
people. If successfully implemented it can become a valuable and persistent 
resource but only if it is well maintained by or on behalf of a series of users 
over the course of a number of years. 

Web-based research 
The breadth of the search will similarly be tailored to the resources of the 
company but with the improvement in web-searching engines the opportunity 
to search on a worldwide basis becomes much more feasible at the level of the 
individual if a search method is developed. 
Knowledge is made up of an association of facts and beliefs, but is coded in 
language. Web-based searching permits detailed searching starting with only 
a hazy idea of the object of the search. Firstly the basic facts can be entered into 
one or more of the main web search engines, as might be the disease, the type 
of product, the desired effects for example, kidney cancer, drug, cure. 
When put into Google this particular example returned 13,200,000 results. 
The addition of and to the search refined it to 5,680,000 and already the top 
search results mentioned approved drugs. This permits the creation of a list 
of existing products firstly already in the market, and then in research and in 
development to be created (see Figure 4.2). 
Therapeutic area Target product 
Company 1 
Company 2 
Company 3 
Company 4 
Company 5 
Company 6 
Company 7 
Company 8 
Company 9 
Company 10 
Company 11 
1 1
2 6 
p o T 7 
h g i H 8 
m u i d e M 9 
3 e n o N 0 1
4 17 
5 21 
Acquisition targets 
Figure 4.2 Search strategy, by segment, by product, by company

The search strategy can then be progressively refined by narrowing the 
criteria to address the aributes of the product profile ideally suited to the 
portfolio in question across several criteria. Inevitably the search will also 
bring out a great deal of ancillary information, and some of this may actually 
contradict the assumptions of the profile. For instance if you believe there is 
lile competition among marketed products in the area which interests you, yet 
you find 20 in development which were previously unknown, this might alter 
your prioritization of the area. However, the quantity of information retrieved 
does not speak to the quality of either the information or the truth about the 20 
products as web data are oen not well maintained particularly if a product’s 
development has already been discontinued. Web pages can be le for several 
years. You need to ask questions such as: Are they all still in development? 
At what stage? What is the comparative profile of each to the other? Are 
the products partnered? Have they been invented by a big company or by a 
university start-up? All the information you can find must then be classified, 
weighted and compared across a number of parameters before the active 
search can begin in earnest. I have characterized this process as ‘mapping’ the 
opportunity and from this multidimensional map an ‘opportunity anatomy’ 
can be derived (see Figure 4.3). Representing this opportunity anatomy in a 
two-dimensional matrix may seem useful but has limitations in its ability to 
communicate the inter-relationships between the component parts. 
Visualization methods can end up oversimplifying what is a truly complex 
situation and lead to false conclusions. Happily this means there is no computer 
program yet foreseen which can substitute for the business development 
No pregnancy 
No bleeding 
Normal cycle 
Single tablet 
within 48 hrs 
Orally bio-available 
No effect on oestrogen 
Rapid clearance 
Extended cover 
No detectable 
No worries 
Figure 4.3 Opportunity anatomy: emergency contraception

professional in the job of selecting which opportunities to pursue in the context 
of the company’s business plan. The many dimensions that have been identified 
in the internal landscape are vastly magnified by the complexity of the real 
world. The task in business development is, however, to perform the ‘art of the 
possible’ and so the refinement of the search criteria can mostly be made by 
the posing of fairly common-sense questions: Is it available? Is it the best? Is it 
affordable? Will it succeed? These reality check questions permit selection of a 
limited list of possible candidates and from these identification of the named 
company or other sources and ideally the contact name and number of the 
person in the company or institution can be made. 
As a result a prioritized list of company contacts can be created for followup 
and a subset of this can become the target list for business development to 
approach. Thus the process has proceeded from a simple list of keywords to a 
refined target group prioritized and partly ‘qualified’. This list now needs one or 
other of two actions. The first may be to very rapidly establish availability – by 
calling the contact at the counterparty company – to see if they would entertain 
an approach for a transaction concerning their product. This may provoke 
them into declining immediately – which will limit the target list further – or 
they may accept conditionally with more or less enthusiasm and commitment. 
Alternatively it may be beer to start with creating a detailed profile of each of 
the targets in order to work out a potentially aractive approach. This step will 
be required in every case but if the initial list is long it might be wise to first 
weed out any poor prospects in order to save time. 
Contact management 
Once an approach has been decided the next steps are to find the best way of 
contacting the ‘counterparty’. Again the number of potential targets of interest will 
dictate the chosen means to some extent, and particularly if business development 
has a portfolio of mandates to deal with simultaneously but limited resources. 
There may be cases, however, due to budgetary or portfolio demands where it 
may be necessary to use all channels of communication at the same time. The 
difficulty that this brings lies in the quantity of information that is generated by 
the search process. Accurate and adequate record keeping and progress reporting 
are a major part of this task. In order to prepare for this, a system of documentation 
needs to be established before the search starts. Whether this is conducted by an 
individual in business development or by a dedicated team for a large group will 
be driven by circumstances. The principle steps to achieving this are: 
Assimilation – collecting information and a recording it. •

Accommodation – collating, ordering and relating it. 
Synthesis – drawing together information to build a business case. 
Crystallization – drawing conclusions are reporting the 
Knowledge management in this context needs to be applied to a suitable 
level for the circumstances. There are many sophisticated computer packages, 
among which are ‘Act!’ and ‘Goldworks’, which have been developed to both 
record and manage contacts, and yet others which have been extended to 
include decision support soware with the objective of discriminating between 
opportunities, such as the ‘Vertical*I’ packages for business development. In 
mergers and acquisitions the package form ‘Evaluate’ provides an updated 
database describing transactions, company profiles and valuations derived 
from bank equity analysis. Each has strengths and weaknesses and different 
requirements of a business development group may need to utilize several 
approaches which can test the ability of the group to adhere to the constraints of 
working within such a packaged approach. For smaller companies the business 
development group’s approach should probably be the simplest possible to 
achieve the objective of the search. There is lile point in having an elaborate 
decision support program if the decisions required are simple, or few in 
number. Here a combination of spreadsheets, simple relational databases such 
as MS Access® and contact management soware packages will be enough 
for the majority of cases. A big company may have to deal with multiple sites 
across the world and so will have to provide an infrastructure to address the 
need for coordinated informed actions, integrated packages which can operate 
over an intranet-wide area network or a virtual private network architecture 
and give real-time communications by Blackberries or PDAs. These units, 
when fed by ‘push’ technologies with content selected by programmed search 
engines and continually sent by email or message to the user, update the users 
and permit consolidation of the latest information relevant to active searches. 
These technologies together with video conferencing, a ‘blog’ approach and 
other communication tools suggest the means to integrate information and 
manage knowledge. Such a service will also require an army to manage the 
package and sufficient training for the business development team in how to 
use it. Seamless integration of inputs on a global basis from R&D to salesperson, 
touching all points in between, is something of a holy grail for big companies 
not least because technology makes possible some of the wilder fantasies of 
the information scientist and the senior manager. However, there is an ever 
present danger of the task of information management taking over from the 
business objective. For many years I was engaged in establishing call reporting 

systems for pharmaceutical sales forces and can testify to the difficulties of 
implementing a soware-driven approach just to data recording. Frequently 
when taking the design brief for the system it became obvious that there 
was a temptation for management to record irrelevant information ‘because 
they could’ and this overcame common sense among some of the sales 
managers. They were possessed with a desire to control rather than guide 
their teams by insisting on a ‘spy in the car’ approach and because of this 
complicated the system. It also made the learning curve and administrative 
burden on the representatives high enough to depress sales. Avoiding data 
gridlock is therefore a major consideration in establishing a recording system 
for business development. The challenge is to recognize the salient factors 
required to make a clear decision and ignore the rest. Achieving this of course 
takes experience and a minimalist approach is usually the safest in the first 
instance. From the point of view of what data to collect a rule of thumb is that 
typically the finer the granularity of the data the lesser the impact they will 
have on the main event. 
The need for an aention to detail should not therefore get in the way of 
watching the big picture in a transaction as it evolves. A good approach to 
maintaining the big picture view is to break down each of the elements that 
make it up into a laundry list of items that must be aended to at each stage of 
the transaction. A methodical approach overcomes the monumental amount of 
detail required to complete a transaction making the task achievable to a high 
degree of quality even with slim resources. 
Returning to the sources of this information and how to find them on 
the web is an obvious starting point as has been discussed earlier. However 
as has been highlighted before, a drawback of web-based information is the 
amount of outdated or redundant data which are mixed with current and 
useful information. My own preference is to maintain a watch on the news for 
several different portals on a regular basis. You can use RSS – ‘really simple 
syndication’ – if your connection, as most are now, is ‘always on’ by flagging 
areas of interest. RSS can bring you latest news across most of the syndicated 
news agencies with high frequency, hourly or even faster. From a competitive 
monitoring perspective it can be extremely useful to have news brought to your 
aention in this way, even if the frequency is faster than you could normally 
react to, especially if the criteria are set tightly with relevance to your interests. 
However, one must restrict the search criteria to avoid being swamped. To 
complement this specific sweep a broad view is also required so that you do not 
miss the unusual, unexpected or just downright new information in your field. 
This can come through main news agencies, vertically channelled sources or 

specialized websites with searchable criteria on an ad hoc basis. CNN, yahoo, 
FT and WSJ are all overlapping news services that I regularly use to maintain 
a world view of general news, economic news, business news and the like 
as global events will affect local occurrences and can also affect transactions. 
Travel logistics, exchange rates and fuel costs can all have a bearing on a large 
transaction and so need monitoring. Industry-specific information can be 
found by drilling down into, for instance, by subscription and at biz. The advantage of using these reporting sites as well as the pure 
news feeds is for the analysis of company news that goes beyond facts and into 
speculation adding useful perspectives. An excellent resource of information 
directly generated by companies is Biomedical Newsanalyzer, which can be 
very revealing. It provides a transaction alert system based on company press 
releases and is structured into specialized information areas. It is presented 
as a searchable database of these company press releases which, as it has 
built up over the years, now gives an insight into the history and sequence 
of actions in the market. For US-based companies SEC filings on a quarterly 
and annual basis also provide detailed insight into the activities of a company 
through the publication of the management discussion sections in the reports 
as well as records of stock sales and other significant financial events which 
can indicate the developing internal situation within the company over time. 
Various other bodies can provide similar reports, including UK Companies 
House webcheck and equivalent information sources from company registries 
across Europe. The combination of search engines, new services, news 
analysis, vertical market monitors and formal or informal reporting resources 
makes for a flexible yet very powerful aggregate source of information. This 
can be supplemented by publications from manufacturing, European Process 
Review, Genetic Engineering News, The Business Development and Licensing 
Journal, and LES News as well as IP and legal newsleers from various law 
firms and tax practices. Equity analysts and placement firms provide data 
either free or by subscription and supply specialist views of aspects of the 
market. But this information is second-hand, and wrien by the company for 
specific purposes; the only way a business development transaction can take 
place is by personal knowledge of the counterparty’s situation. This must be 
acquired actively rather than passively. 
Active searching can take place by direct individual contact, by telephone, 
even to the point of cold-calling a company and asking the switchboard for the 
right contact. It can be through networks of colleagues in agencies, law firms, 
advisors and consultants who can put you in touch by phone or by email to a 
useful contact. Another approach to this can be to hire an agency or consultant 
to make these calls on a ‘blinded’ basis to provide a level of confidentiality to 

the search. Direct approaches may sometimes alert competitors to the possible 
availability of an asset or point out the potential value of an asset to its owner 
if handled indiscreetly. 
The last 10 years has also seen a burgeoning industry in mediated partnering 
conferences. Twenty years ago conferences were usually arranged around 
particular information themes such as medical conferences like ASCO, ASH 
and their European equivalents, and networking occurred and took its course 
between scientists or business people and others interested in these topics. 
Lately the value of the networking has begun to overshadow the conference 
topic to the point where partnering and networking events are held with 
virtually no regard to a conference theme. Halls of partnering booths are 
provided and significant efforts are made to prearrange meetings between 
prospectively interested parties. Business development in this situation is in 
its element. Individuals in bigger companies may have 20 to 30 previously 
arranged meetings with prospective partners over 3 to 4 days during the 
conference. Web-based profiles permit a mutual approach to pre-booking 
of meetings and the schedules are managed efficiently to bring the parties 
together at the event. Bio-Europe, Bio-partnering Europe, Biovision, Biosquare, 
BIO, Eurobiotech Forum, Biobusiness, BioEquity and a host of other events are 
all well aended frequently to the point where a whole community travels the 
globe meeting in various cities and hotels regularly, and exchanging news and 
views in and around business development. These meetings combined with 
multiple banking conferences dedicated to health-care companies for either 
public or private equity investors to understand the companies’ business cases 
provide yet another means for companies to network, this time through their 
banking contacts. 
Apart from providing the chance to present or receive a presentation 
about a potential opportunity, these conferences and events are a mainstay of 
building an effective network of contacts throughout the industry. Aendees 
will be the source of information, rumour, introductions and camaraderie 
amongst the business development community in health-care which assists 
in the interchange of assets between companies, universities and their 
When making appointments at partnering meetings some research is 
required beyond the brief description of the company given on their websites 
or in their brochures. This leads to a matching of the right companies to an 

opportunity or identifying who to meet to open contact with the right company. 
When this research is completed and the bookings are made the company 
representative will then have an agenda of contacts and an objective for each 
meeting planned. 
In aending these events there is a need to recognize that the investment of 
time and money requires sufficient commitment to make adequate use of the 
opportunity. Ideally each company should have at least two representatives 
aending each meeting, one to present and the other to listen, question and 
record the discussions and note any agreed points or actions made during each 
session. These sessions vary from 15 to 30 minutes in length and rotate according 
to the time schedule set by the organizers of the event. Because time is limited 
the exchange of information needs to be well orchestrated. Over the years of a 
‘formula’ has evolved for these encounters which in general produces a useful 
result. Each of the companies will have a prepared PowerPoint presentation or 
similar document which describes the following: 
the company background 
the purpose of the meeting 
a description of the opportunity 
features of the 
– pre-clinical data 
– market data 
– development plan 
the desired outcome 
contact details. 
This presentation will typically be 10 to 20 slides in length and may be on a 
laptop computer and /or hard copy (it is preferable to have hard copies to hand 
in any case to exchange with the counterparty). This will serve the purpose of 
making contemporaneous notes of answers to questions on the relevant slide 
and to make up the take-home message. This assists both teams as the message 
is concise, structured and to the point. Both sides can present and, if desired, 
meet-up later to expand on points of interest and they can fix a meeting then 
and there for later at the conference, or for another date and venue. A full 
presentation with technical data and back-up publications can be reserved 
for this subsequent meeting. Less skilled practitioners unfortunately do not 
stick to this formula and tend to try and present their full company history 
and business case in 15 minutes which neither does justice to the opportunity 

nor permits enough time for the counterparty to reply. Proper preparation for 
these events is therefore highly desirable and will bring beer results for both 
As mentioned above the intensity of these meetings makes them very 
worthwhile if handled correctly during the event but that also requires 
considerable post hoc management in the recording of the interaction in 
such a way that it can be shared with others in the company aer the event. 
Depending on the complexity of the organization this process can be enhanced 
by a standard reporting template in which the contact, content and conclusion 
of each session can be added to an archive for distribution to relevant 
colleagues and then retrieved for later. It may also be included as an aspect of 
the transaction documentation and as a part of the corporate knowledge-base 
of contacts, opportunities screened, and as a measure of the amount of effort 
expended in the business development process. The notes made by the second 
and passive person in the meeting might be entered directly into a document 
format on computer or transcribed later with additional notes. For smaller 
organizations the alternative is the ‘lab book’ approach where each meeting 
is wrien into a hardbacked notebook which becomes a direct archive for the 
business development professional. This is fine for a time but the ability to 
recall the data on the day is limited by the number of books an individual 
can carry! Some form of meeting log is nevertheless required to maintain a 
relationship between companies, which can span many years and even many 
individuals before developing into a potential transaction. 
The search strategy therefore needs to be tailored to the needs of the 
company, the resources available and the potential partners for the opportunity. 
The search itself may be broad-ranging or tightly focused and can be conducted 
passively up to a point but then must be converted into a structured discussion 
to establish where the potential for a transaction exists. How then to decide 
whether a discussion on the phone or in person should be continued, terminated 
or postponed? The answers to this lie in part in the profile of the opportunity 
generated earlier but, very importantly, the interaction will also have generated 
new information which may modify the inputs of the profile model. As a result 
it will be necessary to revisit the profile continuously throughout the search 
procedure in order to verify that the assumptions made were correct, that they 
remain correct and, that the profile itself is still relevant in the light of this new 
data. If for instance one of the key tenets for acquiring or licensing the product 
is that it will be a class leader but it is found during the search process that a 
different treatment modality is about to enter the market with a more aractive 
profile, it is time to change your mind!

Competitive intelligence 
This brings into focus the need for competitive intelligence which as a 
specialty needs to be differentiated from market research. Market research 
is the study of quantitative data about a market and qualitative data in that 
market concerning the aitudes of customers to the products that make it up. 
Competitive intelligence is the acquisition of data on the activities and makeup 
of companies active in the market. Unlike market data, which forecast and 
estimate the size of a market or customer behaviour, competitive intelligence 
is aimed at predicting the actions of competitors and planning suitable counter 
strategies to achieve competitive advantage. It therefore adds a completely 
different dimension to the understanding of the market and the value of an 
opportunity. The search process is a way of acquiring significant competitive 
intelligence about companies and products which will form the medium in 
which your profiled opportunity will perform. Yet the search process will 
also open a window on to your activities for your competitors who will be 
able to observe your own actions and factor these into their own plans. As a 
result, a degree of what can be termed ‘counter-intelligence thinking’ needs to 
be incorporated into your search activities. In a counter-intuitive way despite 
the need to communicate your needs and desires to your audience you also 
need to make the information partial and privileged at the same time. This 
can be a difficult balancing act; on numerous occasions I’ve been engaged in a 
search process and found out much more than I had expected just by talking 
to the company’s competitors, who through constant vigilance knew them 
well. Their investors, their scientists at specialist congresses are also starved 
of gossip and are only too willing to give you their views if asked correctly. 
These sources can be highly indiscreet and although biased in their views, if 
the information is treated with sufficient caution when fully interpreted it can 
oen tell you a great deal more than the company would itself divulge through 
the trained responses of its own business development function. As a result 
your own people in these functions need to be briefed to protect your company 
information; however, as you will never be able to keep your competitors quiet, 
plugging all the gaps will impossible. 
As the search progresses however the company will build up an impressive 
collection of information about an opportunity and this will accumulate into 
an increasingly disorganized mass of quite unrelated data. It is worthwhile 
therefore to sit down from time to time, either alone or with the team, and 
collect the information about each of the opportunities you are pursuing to 
match each particular portfolio need. This can be done either by having a 
standard question list or a template which can organize the information and 

assist with comparisons or, particularly in a team environment, it is useful 
to employ techniques such as ‘mind mapping’ to try and capture the body of 
knowledge which has accumulated and mould it into a coherent model. 
Mind mapping can be achieved using a straightforward pencil-andpaper 
approach or several well-developed soware packages which are now 
available such as MindManager® from Mindjet Ltd. These have the benefit of 
being capable of online sharing through email or used in networked sessions, 
perhaps including videoconferencing where personnel from different locations 
from the company and external sources can participate simultaneously in the 
collection exercise to pool the company’s knowledge. Another advantage of 
using techniques of this kind is that the current state of completeness of the 
search can be evaluated for any individual opportunity or may be used on a 
comparative basis across opportunities. Hence the progress of the search plan 
can be evaluated and further questions that need to be answered noted and 
perhaps assigned to one of the team members to acquire. 
Opening a product’s profile to an independent review is also a good way 
of testing the potential value of an opportunity. This can avoid the risk of your 
internal team ‘talking themselves into’ pursuing a product unnecessarily. Just 
today I was in an investment meeting where a new formulation process was 
being proudly presented to a group of investors by a newly formed company. 
This company had been developing their product towards what they believed 
would be a ‘proof of concept’ and so become an aractive investment for 
venture capitalists. As the questioning by the potential investors became more 
Figure 4.4 Mind mapping

detailed it soon became clear that some urgent data requirements existed on 
which the company had no information. The product’s method of delivery was 
by oral administration of peptides and other large molecules such as proteins, 
yet the mechanism of action of the delivery for their first compound was not 
yet known. Furthermore, although they had observed biological activity through 
effects on surrogate markers, they had not yet detected the blood levels of the 
molecule found in the test subjects. When they were asked they volunteered that 
the bioavailability of the product was thought to be in the range of 5–7 per cent. 
These few facts brought a torrent of questions forward from the members 
of the meeting with a clinical background, such as: What is the inter-patient 
variability in absorption? How many patients had been tested? What was the 
therapeutic index of the products to be tested? (This would mean that if the 
maximum tolerated dose were low and the bioavailability were low in most but 
not all patients, there would be a risk of some patients receiving potentially toxic 
doses of the active products!) How would the low bioavailability be applicable 
to biological products with a high cost of goods? It rapidly became clear that 
the clinical programme necessary to answer these questions and secure the 
needed investment would be far more costly than the company envisaged and 
funding would not be achieved until the questions were answered, making the 
presentation more than a lile premature. Provoking the interest of the investors 
revealed gaping holes in the data which sparked the incredulity among the 
investors and completely altered the perception of the opportunity in a short 
period of time. Had this been a search candidate it would have been easy to put 
it aside and select an alternative until these points were resolved saving time 
and effort for more productive targets. It illustrates how easy it is to become 
blinkered to the faults of a project by being too immersed in it. As a further 
reflection this company had ‘blown it’ with these investors when instead they 
could have performed this challenge process with independent experts privately 
before going to a ‘live’ audience with a half-formed pitch. 
There will come a time, however, when the information required from a 
company which will permit a decision on whether or not to continue with 
an enquiry is of a confidential nature, such as a trade secret, some form of 
know-how or an as yet unfiled patent which cannot be shared without legal 
protection for the company divulging the information. The means to avoid this 
issue is by drawing up of a confidential disclosure agreement (CDA) sometimes 
called a non-disclosure agreement (NDA). The laer acronym may confusing 

in pharmaceutical markets where an NDA is also the acronym for a new drug 
application, thus CDA is quite oen preferred to avoid confusion. 
The CDA acts as anything from a simple agreement to act in good faith and 
not to disclose to others information obtained under its protection or to make 
use of the information without a licence or can become a full-blown contract 
in itself including definitions of the information and with subclauses affecting 
the rights and duties of each party and spelling out the circumstances and 
consequences regarding improper use of information. As this is a legal document 
which can be enforced by one company on another it is prudent to involve 
the legal department in executing such a document. It has now frequently 
become the case that a CDA must be negotiated and rewrien several times as 
unfortunately many companies have fallen into the habit of using a ‘standard’ 
CDA which has aggregated all kinds of protective clauses that have been used 
in the past for such agreements which are retained ‘in case’ they might be 
useful. Sadly this ‘covering the backside’ approach in some cases generates 20- 
page or more documents which are unwieldy and quite oen irrelevant to the 
actual needs of the situation. One is tempted to believe that it would be oen 
wiser to have different levels of ‘stock’ CDAs to facilitate the search process so 
that a ‘CDA-lite’ version could be executed rapidly by both sides to establish 
the presence or absence of a business case without undue delay. If the initial 
diligence proves good then a full CDA can then be established when there is a 
probability that the transaction will follow and will require full due diligence. 
Too much time is wasted in legal wrangling over irrelevant clauses over many 
weeks and at great cost when a simpler agreement would serve the basic needs 
of protecting the disclosing company’s interests. 
A basic CDA should contain as few clauses as possible such as: 
the names of the parties and their addresses; 
the purpose of the document for example, an evaluation of the product; 
the agreement not to disclose confidential information; 
the duration of the agreement; 
an agreement to return any exchange materials required; 
exceptions due to law; 
signatory parties. 
It is also the case that companies have developed a reflex to require a CDA 
before there is any disclosure of information between the parties which again 

is time-wasting and inefficient. While it would hardly be thought professional 
to exchange a CDA with a company and then only share information already in 
the public domain, this happens frequently when people slavishly follow a preset 
procedure without thinking of the consequences. The CDA should protect 
only specific disclosures of truly confidential information. That said it is also 
possible to accidentally learn too much during the search procedure. 
Another document which can be required as the search progresses is the 
Material Transfer Agreement (MTA) which is required when a compound 
needs to be provided by one company to another for the evaluation of 
special characteristics which are claimed, or are believed to be present in the 
compound. For instance, it may be that the partnering company has a specific 
proprietary screen or assay set up. If the partner thinks the compound will 
demonstrate a desired effect which would be required for their product profile 
but the originator company does not have the facilities to perform then the 
sample must be tested by the potential licensee. This is the case in many of 
the larger companies who have developed proprietary in-house assays of very 
high specificity or sensitivity which give their research an advantage over their 
competitors and so they will need to test every potential new compound for 
themselves. Within an MTA specific clauses prevent the testing company from 
performing other tests or modifying the sample in any way. 
The reason for this is clear from a story I heard at a conference once where 
a scientist in one of the larger companies had received a sample under MTA 
from a potential partner. Another of their scientists was asked to perform the 
assay; however, this fellow was rather new and was not aware of the conditions 
of an MTA having just started at the company from a university where free 
experimentation was prey normal. So he took the sample into his lab and, 
because he recognized the type of molecule from work he’d done before, he 
‘helped’ his business development colleague who had been complaining that the 
compound was poorly soluble in water (which can prevent a compound from 
ever becoming a worthwhile product in the market) by altering the compound 
to make it water soluble with his own process. What this did of course was to 
make the molecule instantly extremely valuable. But, although the company now 
had a very valuable asset, it didn’t own it. Furthermore, they couldn’t use the 
information that the modification had permied without disclosing the violation 
of the MTA to the partner which compromised them completely. Under the MTA 
all IP relating to the compound including any accidental inventions remains 
the property of the owner. In the end, I’m told, through complex negotiations 
it turned out that the product could be developed between the two companies 
and in fact may soon come to market. This story also illustrates the need for the 

business development group to have control over the processes during search 
and evaluation of compounds. The value of the intellectual property is the value 
of the product; without this it is only chemistry. 
In other areas of the health-care business such as medical devices and 
diagnostics there are oen parts of IP which are never patented; for instance, 
the know-how required in production. This know-how can be very hard to 
establish and even harder to evaluate. By way of example taken from another 
instance where I was involved, the client had taken over a company in which 
the main product included a technology where the active ingredients were 
suspended in a two-phase liquid. This was then blended by a special process 
which was what gave the product its special release aributes. Unfortunately, 
following the takeover, as a part of the cost reductions which are oen needed 
to justify the acquisition price paid for a company, the man who had been in 
charge of the production process that the suspended the active ingredient was 
made redundant. As a consequence in the subsequent batches of the product 
the liquids started to separate or ‘crack’ aer the batch was made, rendering it 
useless. No documentation change had been made to the process since it had 
been invented and so no one could explain the sudden failure. Aer several 
lost batches which resulted in a period of market withdrawal and involving 
great cost, the client company worked out that there must be some ‘magic’ in 
the way the product had been made before and so the production man was 
found and the know-how recovered, allowing the product back to the market. 
When the acquirer had evaluated this particular product they had looked at the 
IP and the production process procedures but had overlooked the know-how 
required to produce a stable product. 
Initial due diligence 
The process of due diligence in and through the search phase is an intrinsic part 
of the evaluation of opportunities and shows that the value of an experienced 
hand in guiding the criteria for the search and evaluation process is of paramount 
importance. Evaluation thus comes in several different forms: there are 
quantitative, factual, speculative and qualitative elements to an evaluation which 
require a degree of ‘codification’ and some which need a degree of ‘gut-feel’. While 
the pharmaceutical world is full of instances where hearts have overruled heads 
and been right about the value of a product, and the converse situation, where 
products have been wilfully pursued despite the fact that all the evidence was 
stacked against them only to end in ignominious failure also happens, I can offer 
no way of helping to instil the required ‘gut-feel’ into others yet I shy away from 
the idea that everything can be reduced to some kind of quantitative algorithm. 

Both methods serve their purpose in the real world of developing medicines and, 
aer all, as the target of all medicine is the human body, which is highly variable, 
being a biological entity, uncertainty cannot be avoided. This uncertainty sustains 
the need for some ‘art’ within all the science that we can bring to bear. 
In evaluation there are a number of factors which should be borne in mind 
regarding the nature of the evidence which will be reviewed. The most significant 
of these is the selectiveness of the data that can be acquired. Any information 
on early stage compounds will be bedevilled by a sheer lack of data. When a 
compound is new it just cannot be that all of the possible experiments needed 
to answer the many very necessary questions will have been performed. One 
example is the information on ADMET (absorption, distribution, metabolism, 
elimination and toxicology) for a compound. The baery of tests available 
for these evaluations has proliferated in the last 5 years to the point where 
no minimum standard of, for instance, safety is clearly accepted either by 
companies or regulatory agencies. The result is that few companies can afford to 
perform more than a sample of what is available. Data on the pharmacokinetics 
(PK) and pharmacodynamics (PD) of a compound need to be established in 
vitro, then in vivo in recognized animal models (and these may not even exist 
for some new classes of compound) and very possibly in human tissue models. 
Yet even these tests can do very lile to predict the likely response across such 
variables as genetic difference or dietary effects and these can profoundly affect 
the potential of a drug (see Figure 4.5). 
It has to be accepted therefore that the level of risk in early compounds is 
extreme and this reduces only gradually until studies in quite large populations 
have been tested. Consequently the evaluation of a compound or other kind of 
asset must be realistically limited to what it is actually possible to know at the 
time, and acted upon accordingly. 
My own chosen method is therefore an amalgam of so and hard features 
each of which cannot be directly compared or inferred one from another but 
can be elaborated into what I’ve called an ‘evaluation array’ (see Figure 4.6). 
The idea behind this is to place alongside one another the salient features 
of an opportunity and reach a kind of ‘sum value’, recognizing that there is 
no way of performing a valid calculation which can discriminate between the 
opportunities. The idea of an array comes from the computing world where a 
variable in array can either be independent, dependent or variable. Although 
the concept of a variant variable may seem a lile esoteric, let me try and 
explain. The independent variable in any array is the fact which stands alone, 

Figure 4.5 Genetic reduction of market opportunity 
Reduction in opportunity 
Total population 
Disease-susceptible patients 
Remaining treatable population 
Drug-sensitive patients 
Remaining treated patients 
Assuming a combination of two genes, one from each parent confers the trait. 
Disease genes ++ +- -- 
-- +- ++ Drug genes

such as the incidence of the disease of interest in a particular country. If the 
incidence and the death rates (or sometimes the cure rate) are known then 
we can work out the prevalence. From this the total population which can be 
treated at any one time is an independent variable in the array. The treatment 
rate, however, is dependent on the rate of diagnosis and the compliance of the 
patients with therapy which can be estimated and sometimes altered by the 
existence of a product to treat the disease. Hence the dependent variable is 
made up of a number of factors which can alter over time and be influenced by 
actions such as product promotion. Such promotion is itself a ‘variant’ variable 
in this analysis because you can choose how much goes into this and change 
it at will. 
The evaluation array therefore is a conceptual spreadsheet, so it can be 
modelled – up to a point – but because of the number of dimensions involved 
it needs then to be appraised by ‘eyeballing’ the resulting data and making 
a judgement about the relative worth of each piece of data and the whole 
‘package’ of information the array describes, and then choices must be made 
based on this. 
As pointed out above the chances of being wrong are very high in all cases 
due to the nature of the medical treatments. Tamar Howson, who leads business 
development at Bristol-Myers Squibb, made this very observation at a recent 
Figure 4.6 Evaluation array 
Arrays are grid-like calculation tools which can have many dimensions 
Variable 1 can be fixed, or made up of factors 1, 2, 3, or more. 
Variable 2 – ‘n’ has the same characteristics. 
So a result can be generated for different variables made up from multiple factors. The 
factors and variables can then be altered to see their effect. 
Factors F
V1 V2 V3 V4

conference in London. Four out of five of the late-stage licensing deals her 
company had concluded in the preceding couple of years had failed to make 
it through the clinic. This was due to no failure in the business development 
process but merely reflects the nature of risk in the pharmaceutical industry.

Modelling and 
One of the most contentious issues in business development is valuation. In 
truth there is no method which will provide a correct value. Value can only be 
accurately gauged when an asset is realized. Between the invention of an idea 
for a product or company and the eventual sale, no maer what method is 
chosen to act as a surrogate for the real value, intangible elements will remain 
and confound the accuracy of any valuation. Even when an asset is sold the 
price paid may not match its expected value. 
I was involved in a transaction to purchase the marketing rights from one 
of the biggest companies for an older product which no longer fit into their 
strategy. The larger company had set a floor price below which they would 
not sell and this was based on a multiple of the residual sales (these were 
continuing despite a number of years without the product being promoted). 
The acquiring company needed to find extra funding in order to acquire the 
assets. They believed that even with an upfront purchase price of $90 million 
plus royalties on sales of the product they would be able to revive the product’s 
fortunes in the market by relaunching it. They were also able to add two new 
indications through more clinical development and consequently their model 
showed that there would be sufficient value to repay the financing costs and 
yield a substantial profit. By raising the required capital the company went 
on to complete the transaction. As luck would have it, the acquiring company 
became so cash rich because of this acquisition and because of raising more 
money to fund the clinical developments that it became the target of a 
takeover. Yet less than 2 years later those same assets which it had bought for 
$90 million were sold on to another company for only $19 million by the new 
owner. Intrinsically it was still the same product and in the same market, but 
for the people making the valuation second time around, there was a very 
different view of the product’s worth. This example illustrates several features 
of the valuation process but it underscores the most significant which are the 
assumptions which underlie the model.

Essentially valuation is dependent on a qualitative and quantitative model 
which is made up of a series of assumptions. Each of these is based on data and 
observations of the market which are then mixed with the prejudices, guesses, 
hopes and ambitions of the modellers. In many respects the modeller and the 
model the surrogate for the asset, and so the method used to build the model 
has a major effect on the outcome. One way to try and overcome the bias and 
risk that this exercise brings is, where possible, to have more than one modeller 
using a different method to create their model. In this way the different models 
created can cross-check each other. If the results of the different models are 
similar there is some hope that an approximately true result will not be far 
away. Naturally if the results of the models are wildly different the reasons for 
this may become apparent and corrections maybe applied. In navigation either 
at sea or in the air, a similar method is used for position fixing. The navigator 
will take not one or two but, if possible, several bearings from objects on the 
horizon from which they can plot as intersecting lines on a chart to find their 
position. However, the lines most oen do not meet at a convenient point and 
will oen leave a small usually triangular gap known as a ‘cocked hat’ (see 
Figure 5.1) especially when three bearings are used in which the vessel is likely 
to be found. The bigger the triangle the less sure the navigator is about their 
location which, if the triangle also contains, say, a reef, may become a problem. 
So to refine the result of their cocked-hat position-fixing method, the more 
bearings the navigator has the beer. 
Figure 5.1 A ‘cocked hat’

In a similar fashion GPS, the global positioning system, uses many satellites 
to achieve an accurate result (see Figure 5.2). When only a few are above the 
horizon the position fix is perhaps to the nearest kilometre or so, but if there are 
eight or more satellites, positions can be fixed to a few metres. So it is clear that 
whether one modeller is used and several methods, or many modellers and 
many methods, relying on only a single aempt no maer how complex would 
be the most risky approach to modelling. 
Approaches to modelling 
In health-care markets a few basic approaches are in common use and each 
has its merits and drawbacks yet as the complexity increases there is a greater 
likelihood that the results obtained may be influenced by minor alterations in 
the assumptions. The first and very common method I shall refer to is ‘top 
down’, which is when the model is created using the sales figures from existing 
products in a market as the definition of the market itself. An example: if a new 
ACE inhibitor product enters the ACE inhibitor market it might reasonably be 
expected to take market share from the existing products unless somehow it 
were to be used in a completely different set of patients with another disease. 
Suppose the market were made up of five products. If the new product has 
beer features than three of the other products, and they represent 50 per cent 
of all sales in that market, then the new product might be expected to take half 
Figure 5.2 GPS triangulation

of the sales of each of the three over 5 years, eventually achieving a 25 per cent 
market share (see Figure 5.3). 
This top down method is quite reasonable and fairly robust but, as can be 
seen from the example, it is very simplistic in its assumptions. It would only 
take the introduction of new products from another class of compounds (which 
also affect high blood pressure or congestive heart failure in a similar way) that 
produce beer effects to reduce the market opportunity for ACE inhibitors. 
This would alter the value of the ACE inhibitor market dramatically and even a 
25 per cent share might be worth much less than anticipated. As a result of the 
need to take this into account the next level of model must include all the other 
players in the market. 
Carrying on with the ACE inhibitor example, this then means all products 
in each of the clinical indications in which ACE inhibitors are used must be 
incorporated in the model. This will mean including not only the ‘approved 
indications’ for which the products are licensed for use but any other clinical 
uses. This introduces both quantitative and qualitative elements to the model 
and requires considerably more information if we are to have a hope of its 
being accurate. Typically for pharmaceuticals a quantitative meausure may be 
a count of the amount of each product sold by price, by units and by weight. 
The reason for these measures is to establish the overall value of the market. The 
number of dose units establishes the number of times patients use the product 
and the total, or aggregate weight in kilos of a molecule that is included in 
many different forms such as tablets, capsule or injections, can establish which 
product is selling the most out of a group of competitors. Another quantitative 
7.5% 10% 
Original 100% market New product penetration 
C D 
Figure 5.3 Market share penetration

measure is counts of prescriptions which give an estimate of what disease the 
products are used for. This can also show the effectiveness of the promotional 
effects of the company. Each of these elements is interlinked and gives substance 
to the model. 
However, within this newfound structure there is a problem in that the sales 
figures by value, units and weight are usually collected at source and so are 
close to census data that is, representing nearly the whole universe of products 
sold. The prescription data, however, are collected by sample which means that 
the data are only a representation of the total universe of prescriptions and so 
are open to a much wider interpretation and error. Many years ago, I launched 
a product in the UK and became a victim of this anomaly. The product was also 
being studied by the headquarter function of the company I was working for. 
They believed that available prescription data were as accurate as the sales data 
but, unfortunately for them and for me, among the sample of doctors recording 
the prescriptions in the UK was one man who had a dispensing practice. He 
had made our new product his product of choice thanks to our persuasive 
representative and so all of his prescriptions for new and switch patients 
received our new product. However, the market research sample, including 
his data, was then projected up to a ‘national equivalent’ and the headquarter 
researchers came looking to me for the sales of the new product. According to 
the prescription data it had a 7 per cent market share the first 6 months aer 
launch, while its sales were less than 1 per cent! 
Complex models 
More complex models than the previous approach include the underlying 
epidemiological data for the disease. These data too in most countries are 
based not on census reporting but on sampled data. As a result the number of 
patients thought to have a disease is expressed as a rate per 10,000 or 100,000 
depending on the sample size and the projection factor, which can magnify the 
margin of error. At a national level, such a model serves very well for policy 
planning purposes; however, the danger for the modeller lies in taking this 
approximation of the real world created from samples and using it as the basis 
for a detailed financial model. 
While this criticism serves to emphasize the fragility of the data there is 
frequently no other or beer alternative. Questions concerning approximation 
are, however, vital in the context of a valuation where forecasts need to be 
turned into cash. Using epidemiological data or algorithms and applying them 
to fundamental datasets can give the appearance of a very realistic or indeed 

surreal view of the dynamics of the market. The underlying trends may give 
a worthwhile indication of the growth or decline, yet the more surrealism that 
is injected into these models the greater is the danger that they will be taken to 
be a true representation of the world rather than what they are, which is just a 
fallible model. 
The greatest peril in modelling is that in order to achieve the sensitivity desired 
to engender trust in a model it may become prey to outlying data points and freak 
occurrences. Markets may be changed by political or economic events and climatic 
changes referred to as acts of God or ‘force majeure’. Because these events are by 
their nature unpredictable they cannot be modelled and lurk behind spreadsheets 
to confound the unwary. Even relatively benign events, such as a change in 
reimbursement in a major market, can have dramatic effects on pharmaceutical 
markets. The addition of diagnostic procedures to a reimbursement plan has oen 
been seen to drive up the number of diagnoses dramatically; an example being 
in the diabetes market, which increased sharply when many countries decided 
that the economic burden of the disease on society far outweighed the cost of 
diagnosis, treatment and reimbursing glucose stick use. 
An improvement in sensitivity in a diagnostic procedure can have similar 
effects. The introduction of simple cholesterol testing at point of care has 
been a major contributor to fuelling the market for ‘statin’ treatments for 
mild hypercholesterolemia and added billions to the market for preventative 
cardiovascular medicines. Acceptance by health-care authorities of the statistical 
relevance of treatment of both raised blood pressure and cholesterol has been 
a significant source of pharmaceutical growth. The proof of the value of those 
interventions has though only recently become available, as the population 
statistics including the changes in major cause of death seems now to be bearing 
out the model that preventative treatment will reduce deaths from coronary 
heart disease. This is now clearly shown to be the case despite the confounding 
coincidence of a reduction in smoking and improved diet and exercise. 
It should not be forgoen that models as a function of their simplicity are 
therefore a fiction and it is easy to come to disparate conclusions if the model’s 
parameters are interpreted differently. In establishing a model for transaction 
it is therefore important to derive a model using a similar methodology to 
the one the counterparty has used or if not similar in method, one which 
achieves congruent results. Hence the approaches need to be based on, as far 
as possible, contiguous datasets. Suppliers of census and sample data include 
IMS, DataMonitor and their affiliates and subsidiaries such as Sco Levin and 
Walsh Systems. 

What then is the right model? What degree of sophistication or otherwise 
is justified to produce a robust basis for valuation? Factors affecting the answer 
include the following: 
Timing, if you have very lile time to create the model then 
complexity should be avoided. 
Data, if the data available are scarce or untrustworthy – which 
may be because the collection method is vague, or the collection is 
discontinuous – wider parameters need to be accepted for variance 
in the model. 
The audience, this differs according to business culture and 
particularly in the USA ‘hard numbers’ are required on every 
available occasion, while in Europe and in Japan more reliance is 
put on interpretation as data sources tend to be less robust. US 
companies and financial institutions put great store in having a 
quantitative model including as much data as possible to ‘mimic’ the 
market. To European eyes this reliance on quantitative modelling can 
seem obsessive yet like it or not, if you’re counterparty is American 
a solid model is a prerequisite to a partnering discussion. 
More complex models will therefore include not only data on the sales of 
products and the number of patients in the market but the number of prescribing 
physicians, the number of representative calls made by your own and competing 
companies, prescribing policy and reimbursement trends, competitive products 
entries and the like. The result of such a model is an exquisitely sensitive 
tool which can be used as the basis for forecasting the potential of a product, 
the markets or a patient population. The next step is therefore to produce a 
forecast. This in itself brings another difficult choice of method as there are 
two fundamental paths to following in forecasting. The most usual is to look 
at a model and from the conditions decide or derive an initial estimate of the 
potential of the product. This might be 0.5 per cent of the market or maybe 1 
per cent in the first year. Following this and the other assumptions in the model 
an estimate can be made of the next year and onwards from there to produce 
a sales line for maybe 5 years during which time the major parameters of the 
model such as the population size are likely to hold good. Typically two or 
more other forecasts are produced with slightly differing assumptions on the 
influence of the key drivers in the model to generate a low, medium and high 
forecast line which expression represents degrees of confidence in the model 
and its resultant forecast. This method is rational and quite satisfactory for most 
purposes; however, in pharmaceutical markets where treatments have not been 

available before and where the model characteristics have lile or no precedents 
another method may be more appropriate. This is sometimes referred to as an 
heuristic or ‘prophesy’ method. The central feature of this method is to set a 
target figure for say the fih year and then test the possibility of that number 
being achieved within the constraints of the model. Let’s assume the target has 
been set for €100 million turnover in the fih year. That figure can be derived 
from a number of units being used at a given price. In order for this to happen 
a specific number of patients will have needed to have been diagnosed and 
treated with the product and then to have completed a course of treatment 
of a given length. A given number of doctors must have been contacted and 
converted to the use of the product. This logical sequence allows questions to 
be addresses such as: ‘How likely is it that this can have occurred within the 
model constraints?’ It is oen very useful to graph each one of the components 
of the model to see if there is a visual continuity in the development of the 
figures. If a sudden jump is required in the model affecting one or more of 
the parameters it is likely that the target figures will be unaainable under 
those assumptions. This leads to the conclusion that either the target number 
is wrong or the model is wrong. It naturally follows that this method can be 
used to explain doubts in the expectation of counterparties and their forecast 
and models and become an integral part of the negotiation process. So-called 
‘challenge targets’ internally set by the company can be deconstructed using 
this method too. 
However, before that point is reached it is advisable to subject the finished 
model and the forecast to what is referred to as ‘stress’ or ‘sensitivity’ testing. 
This process is achieved by taking the model and varying each of the parameters 
or assumptions to estimate the sensitivity of the model to that single parameter 
or any other logical combination of parameters. If the model is seen to produce 
extreme results through only a small shi in one parameter or another, it is 
vital that the underlying dataset for the parameter is as robust as possible. If for 
instance market penetration is a function of representative call rate, the quality 
of calls or the type of doctor being detailed, the product may also be the issue of 
critical importance. A closer understanding of the dynamics of this component 
might be needed and additional market research must be conducted. 
New product issues 
New products are notoriously difficult to model and one of the most sensitive 
factors in such models is the product’s proposed price. Consequently qualitative 
research is most frequently required to derive pricing models for the market 
and the product. Many times products have been launched with entirely false 

expectations of what the potential might be because the price point in the 
market has been misunderstood. 
To address this issue there are various ways to estimate price. The most 
obvious is to use an existing product as the benchmark. In interviews or focus 
groups doctors can be challenged to estimate the likelihood of their paying 
a particular price for the product. The profile will be read out to the doctors 
and they must choose where in a scale of prices they would feel justified in 
prescribing the product. An alternative is to read out the profile description 
and then ask if they feel it should cost more or less than each of a number of 
reference products. This technique can be particularly useful where doctors 
have lile knowledge of the actual cost of products, since a sense of the value 
can be established by relating it to different aributes than the price in isolation 
which, taken alone, can sometimes generate misleading answers. For instance 
the doctor may not consider a product too expensive for herself at €5.00 per 
month, but if the patients in her list are poor she might choose to say the product 
is too expensive on their behalf. As an alternative, relating the medical benefits 
of the product profile to other well-known products can elicit less guarded 
responses which will be guided by more pertinent issues. 
By following these procedures a model of known reliability will be created 
and its dependence on the various contributing factors that make it up will be 
known. Forecasts will have been generated for the model and tested against 
the limitations checks of the model in its various states and now be ready to 
produce a valuation. 
What then is meant by valuation beyond having generated the sales 
line from the model? Firstly the costs associated with the product need to 
be superimposed on the forecasts to generate an estimate of the financial 
contribution; the sales less the cost of making the sales gives the gross margin 
and following from this the gross margin less the cost of goods gives the 
contribution. The cumulative contribution of the product can then be estimated 
over time (the cost of sales are not constant as they will be higher at launch and 
then reduce thereaer throughout the forecast period). It is worth mentioning 
that there is a wide variation in the launch costs required, for example, between 
hospital and primary care products. Similar wide variances occur between the 
continuing costs of medicines for acute conditions like those designed for a short 
duration of use, such as antibiotics (where physicians may choose from several 
comparable products), and the costs of sales for long-term illnesses or chronic 
medications which generate repeat prescriptions (where the products are less 
likely to require constant visits by representatives to stimulate continued use 

by the physicians). Advice from experienced marketing staff is of great value in 
gauging the amount of expenditure on sales and marketing required to achieve 
a successful launch and to maintain sales growth of different types of product 
and in different kinds of markets such as the cyclic markets like antihistamines, 
travellers’ vaccines and the like where annual promotional ‘bursts’ of activity 
are needed. 
Another factor which plays a part might be high cost of goods as this can 
drive the in-market price for a product to a point where market penetration 
becomes limited and this is particularly so where patients are making the 
purchase or making a significant co-payment. This is accentuated even more 
if the product is for a disease which is more inconvenient than painful or life 
threatening and price elasticity is low. At the company level in the context of 
a portfolio, a product which has a low margin or is resource hungry will have 
a value impaired by comparison with more typical products as it may take 
cash away from other operations and depress earnings unless the volume of 
sales that it generates can compensate at the level of cash flow by passing the 
contribution threshold. There is therefore a balance to be met between the 
cash the product brings in and its overall effect on the company. The value 
will again have to be calculated as an absolute amount and in relation to 
the portfolio to give a true estimate of its value. In the absolute estimation 
a discounted cash flow method is most frequently used to decide whether a 
product will produce profits based on its assumptions in the model. The most 
frequently used result from this cash flow analysis is the expression of the 
‘net present value’ of the project. 
Measures of value 
I was siing in a conference one morning recently alongside one of the investment 
directors of a medium-sized venture fund whom I know. We were listening to 
another panel of investors, bankers and company partnering executives talking 
about the state of the market and the opportunity for an initial public offering 
(IPO) versus a trade sale to a big company. The alliance director from one of the 
bigger pharmaceutical companies had just offered the opinion from the panel 
that in a competitive market it was sometimes worth making a high upfront 
payment to secure a key piece of IP. Another of the panellists asked him how 
he judged the monetary value on the bid to which his answer was, ‘Enough to 
make sure we win.’ I asked my friend from the venture capital fund how they 
made their investment valuations and if it was more scientific, to which his 
reply was, ‘No one knows how to value these companies – we all just guess!’ To 

a large extent this is absolutely true. It’s really just a maer of how you guess 
and who believes you. 
Different value perspectives 
When it comes to valuing an asset, whether it’s a company, a product, a 
development project, a technology, a manufacturing method or an IP position, 
the value has to be seen in the context of whoever is looking at it. The relationship 
between the asset and its value can only be established from the points of view 
of the buyer and the seller. In either case at base there will be an ‘absolute’ value 
which might be derived from the cost of producing the asset added to which 
will be the ‘potential’ value based upon a forecast, in other words what the asset 
may be able to generate in terms of future monetary returns. Unfortunately for 
the person doing the valuation, a brilliant idea may have cost nothing but be 
worth millions, while a project which has cost millions to develop may end up 
being worth nothing. Consequently much more needs to be considered before 
arriving at an expression of appropriate value 
The first question to ask is: Who is the acquirer? What is their motivation? 
How well funded are they? What risk tolerance do they have? These and 
other questions need to be answered en route to achieving an asset valuation. 
Moreover these questions must be addressed at the particular time of the 
valuation as the context of the valuation is vital to the result. A product which 
is a first-to-market product opening up a new area of medicine may be very 
valuable; conversely a product which succeeds and surpasses the first-to-market 
may be even more valuable as the market will have been established and any 
‘room for improvement’ identified opening the opportunity for the newcomer. 
Thus the circumstances surrounding the judgement of value are frequently the 
critical deciding factors, and hindsight is a luxury yet to come. When many 
a deal is first announced it is viewed with horror by financial analysts in the 
light of what they knew about the company at the time of execution, but they 
are sometimes forced to recant a year later when the deal is revealed as giving 
a huge advantage to the buyer because of developing features not apparent to 
the outside world. Conversely the opposite happens just as frequently with the 
result that another CEO leaves to ‘spend more time with his family’. 
New ventures 
Many as the issues are surrounding the valuation of an existing company, these 
are accentuated to almost grotesques propositions in the case of new ventures. 

This could be a new company or an internal project within a company for a 
new business area. There will be problems around the lack of data about the 
market, and uncertainties about the technical feasibility of the technology or the 
functional performance of the product in a treatment seing. A good example of 
some of the key issues affecting new ventures is one I ran into while in investing. 
This particular product had been developed for the treatment of head and neck 
cancer using photodynamic therapy, a procedure which involved injecting the 
patient with a product which was taken up preferentially by cancer cells in 
the surface layers of the mouth and throat. These layers are prone to cancers 
because of their exposure to environmental carcinogens. These areas would 
then be exposed to laser light of a specific frequency which would activate the 
product and destroy the cancer cells. The product had been developed at some 
considerable cost and in practice had been shown to produce effective removal 
of enough of the cells to provide a medium-term solution to the disease by 
preventing the continued runaway growth of the tumour. It could be used 
again and again to palliate the patients’ condition. Therefore the company had 
an effective therapy for a serious disease where few other treatments provide 
worthwhile long-term benefits. 
In theory therefore this should have been a very valuable product, but 
the company had had enormous difficulty in raising funds. There were many 
reasons for this but one of the most telling was that that the experimental use 
of this kind of therapy had never been successfully converted into a regular 
treatment before. In part this was because earlier photodynamic therapies 
that had been tried were plagued by side effects (these products stayed in 
the bloodstream for too long aer the treatment session and because sunlight 
also contains light of the frequency of the laser light, patients were required to 
stay indoors during daylight for weeks). Because of this none of the medical 
reviewers had a good opinion of this method and this affected the view of the 
financial analysts as they could not find any positive references in the medical 
literature or any data for an existing market for the treatment of head and neck 
cancer. These factors contributed to the product receiving inadequate funds to 
conduct extensive clinical trials which further reinforced its negative image. 
In the end the product did come to market but has yet to succeed as it lacks 
the funds for the education and promotion which it would require to become 
beer accepted. 
This story demonstrates the difficulties of valuation in this sort of situation. 
It is extremely hard to achieve where there is no comparator product, no 
existing treatment which can show the extent of the opportunity and so also no 
precedent for pricing. When there is lile in the way of solid fact on which to base 

a valuation it is difficult for potential investors to judge whether the potential 
of a product will exceed the investment required to bring it to market and, 
naturally, this leads to many products being without funds and undeveloped. 
Investors will err on the side of caution when they do not understand a model 
or distrust its data. 
Steady state 
This is the most comfortable situation for a forecaster is that when a steady 
state exists; there is usually sufficient history to obey the statistical rules of 
‘two periods of back data to permit one period of forecast’ with a reasonable 
amount of confidence. A steady state does not have to imply a flat performance 
of a product; it could be that due to population increase there is steady growth, 
or that due to an increase in competition there is a steady erosion of market 
share and a decline. In such a situation it is reasonable to use the forecast of 
sales as the basis for valuation and to use the discounted cash flow method or 
even more simply a multiple of the total sales. Obviously the direction of the 
forecast will then affect the multiple used commonly being closer to one times 
with a declining sales paern and two to three times for flat sales or a modest 
growth. When a product is performing well multiples may be higher but this 
can also be affected by there being a premium being paid for such an aractive 
asset above the absolute sales. Consequently multiples of five or six times sales 
are not unknown where growing assets are being traded. 
The question of why a seller would choose to dispose of such a product 
becomes an important one. In a consolidating market the most usual cause is 
the forced divestment of assets during a merger or acquisition where agencies 
such as the Federal Trade Commission or the anti-competitive activities arm 
of the European Commission must rule on the combination of portfolios 
between prospective partners to ensure that a monopolistic position or market 
dominance does not result from the merger or acquisition and so disadvantage 
the consumer. 
Buying or selling 
Notwithstanding the basis for the value, an overriding issue in valuation is 
whether the person making the valuation is buying or selling. To use a familiar 
example: when you are selling a house you put a significantly higher value 
on your own property than you would if you were seeking to buy it. In the 
biopharmaceutical market assets also have different values according to the 

motivation of the seller. This emotional component of a sale will oen have a 
greater effect on the price that will be paid than the history or the predicted 
sales. It is also important to understand who approached whom with the 
proposal to buy or to sell. A potential acquirer may make the first move, yet this 
may sometimes stimulate the potential seller either to have a higher expectation 
of value or, if they are unsure, to seek competitive bids to find a beer offer 
than the initial approach. In company acquisitions the notions of ‘friendly’ 
and ‘hostile’ bids are usually widely separated in terms of value. Boards of 
companies receiving ‘hostile’ offers are oen seen to respond in the press with 
protestations that the offer ‘grossly undervalues’ the company and its assets. 
They hope to stimulate competitive bids which will force improvements to the 
original offer, leading to a process which adjusts the value of the offers until the 
bid succeeds or fails. 
If, however, a seller puts an asset up for sale in the absence of an existing bid 
there is an element of ‘fishing’ for a value as was seen in 2006 with the divestment 
of the family-owned stake in Serono. This stake was originally discussed in the 
financial press as having an expected value of ‘around 15 billion Swiss francs’ 
and yet it was later withdrawn from sale as none of the potential suitors for the 
company could justify that price to their own shareholders. In the end the stake 
was acquired by Merck Kgaa from Germany for a more modest 11 billion Swiss 
francs which represents a CHF 4 billion difference between the ‘bid’ and ‘offer’ 
prices – or around 30 per cent! 
Expectations of value can be accurate, ambitious, mistaken or just downright 
cheeky but when the game is started if there is to be a sale, the buyer and the 
seller will have to find common ground. It is therefore prudent, when entering 
into the process, to consider a wider range of factors than purely a financial 
calculation. When I am asked to assist in the buying or selling of assets between 
companies among the first considerations I take into account are the timing, the 
motive, the motivation and the commitment to close the transaction. These must 
be satisfied before we select the type of buyer or partner to be approached. A 
symmetry and alignment of interests between the parties is very oen pivotal 
in achieving (and defining) success. 
Enterprise value 
An enterprise value of a product or company is probably the most common 
benchmark for valuation in that it represents the sum of the values of an asset, 
for a product these might be sales, IP rights, manufacturing capacity, inventory 
and trademarks. Each of these can be assigned a nominal value and be adjusted 

for risks due to competition, market growth and the like. The enterprise value 
of a company can similarly be considered as the sum of all its assets. Where the 
company has shares traded publicly, equity analysts are continually making 
assessments of the ‘fundamental’ value of the company compared to the price 
in the market and seeking to find cases where the stock price is higher or lower 
and so where trading opportunities exist. However, an enterprise value is only 
an expression of the sum of the assets and liabilities at that time and so may not 
be directly related to the value that an acquirer, as opposed to a share purchaser 
would put on the company. It is a fair gauge of the value of the core assets but 
not their price in an acquisition market. 
Strategic value 
The strategic value of an asset is much more the expression of its potential 
worth in a particular set of circumstances. This might be the case for an 
otherwise excellent product currently languishing in the hands of a company 
that is too small and lacks the resources to promote it properly or, conversely, 
a large company whose concentration on other products in their portfolio 
causes the product to be neglected. This kind of product might thrive in the 
hands of a different company with the opportunity and desire to market the 
product more effectively. In this situation the value of the product to the owner 
will only be what they can make of it alone while a suitor company might 
see the chance to make a great deal more through the addition of their own 
capabilities. An entrepreneurial approach to such an asset might lead to an 
acquisition bid for the product or for the company; alternatively, it might result 
in a licensing transaction where combining resources results in an increase 
in performance which is shared between the partners. Strategic value comes 
about from the matching of an asset to the most appropriate resource base 
to maximize the asset value. This is one of the most powerful drivers of the 
business development process. 
The way to estimate strategic value in the financial sense, in other words 
the premium paid beyond the enterprise value, is probably the valuation 
issue which is least amenable to any form of method or systematic analysis. 
Although previous transactions from external benchmarking or from the 
company’s own experience may give some kind of lead, even if there is true 
comparability between the benchmark and the valuation subject, differences 
in market conditions from one day to the next will oen have major influences 
on the price of an asset. The acquisition of Hexal by Novartis’ Sandoz generic 
division in 2006 was widely criticized at the time as being too costly, yet 
immediately thereaer Teva bought Ivax to re-establish their market position 

among generic manufacturers which had become threatened by the creation 
of the Sandoz–Hexal link up. The price that Teva had to pay for Ivax was 
significantly more than they would have been expected to pay before the Hexal 
deal had re-benchmarked strategic pricing in the generic sector and sparked a 
round of consolidation acquisitions as each of the market leaders vied for the 
remaining companies to shore up their respective market shares. It should be 
noted that Ivax was willing to sell to Teva. What was the reason for the high 
price for Hexal? Almost certainly this was because Teva had also been bidding 
for it. Sandoz pre-empted a Teva acquisition by making an irresistible offer 
to Hexal’s owners. This kind of bidding was repeated over Pliva later in the 
year with Barr Laboratories winning out aer raising their offer three times 
bearing out the elasticity in strategic asset valuation particularly in competitive 
or auction bids. 
Redemption value 
When assets are put up for sale voluntarily, or sometimes involuntarily such 
as during a company liquidation, the valuation methods that are used tend 
to be more rational than the bidding for strategic assets and more oen than 
not achieve less value for the vendor. In a case of this kind, contrary to the 
adage, the sum of the parts is actually less than the whole as the individual 
components are worth less alone than when valued together. Liquidations in 
particular normally operate under the further constraint of a time pressure and 
so administrators are more likely to accept a solid bid for an asset even if it is 
lower than the theoretical valuation might indicate. Similarly an asset’s value 
may be impaired by unwillingness of its owner to continue providing funds 
for it if a portfolio review has decided that the asset is no longer a part of the 
core group of products which will be the drivers of growth for the company. 
If a divestiture is likely it should be executed rapidly as holding on to such an 
asset in order to obtain the best price may not be in the best interests of the 
company’s finances if it must maintain the value by maintaining expenditure 
on the asset. 
Another consideration which affects the value of an asset is the ‘currency’ 
that is used to pay for it: cash, equity or goodwill. Equity in place of cash can 
either be a compelling offer or quite the opposite. On many occasions when 
evaluating the value of a potential acquisition target the value of a ‘cash bid’ 
compared to the headline value that other companies were prepared to offer 
in the form of shares in their own company made poor comparison. The 
acquisition of Agouron by Warner-Lambert in 1999 was one of several deals 
at the time which were funded by an offer of stock of the acquiring company. 

Agouron’s acquisition had a headline value of $2.1 billion and set the pace for 
small company buy-out expectations for later deals. I was then evaluating the 
potential for a non-equity offer for companies in this sector, yet the valuation 
we reached was barely more than $1 billion when denominated in real money. 
In other circumstances offers have been made using stock in which the target 
company, on reviewing the offer, finds it has no real faith in the persisting value 
of the stock that it has been offered. This can lead to outright dismissal of the bid 
or may require a considerable increase in the number of shares demanded to 
compensate for the perceived lack of substance. Proffering or accepting a stock 
offer in these circumstances relies on equity analysts’ providing a continuing 
positive opinion of the merged companies’ future valuation to deliver 
shareholder value and this aer all is the final denominator. As a shareholder 
the investor needs to be able to sell their shares at a higher value than the premerger 
What stems from this discussion of these factors is the realization that value 
can be viewed from a myriad of different perspectives, angles and directions, 
whether it’s buying or selling, solicited or unsolicited bids, cash or stock and 
the timing of the payments to name but a few. 
The structure of a transaction can be as much a means to capture the 
value as the aggregate cash equivalent, it’s all in the ‘optics’ or how people see 
things. In everyday life we normally buy small assets outright for cash and 
we defer the payment for other, oen larger, purchases by means of credit 
cards, instalment purchase or by means of a mortgage arrangement. In the 
same way an acquisition or licensing of an asset can be structured to reflect the 
value it has at the present moment and bring further rewards when and where 
the asset is likely to appreciate, through the milestones of its future value. 
It is worth noting here that with the concept of future value there is a need 
to accept a degree of risk and this may be reflected in the absolute value by 
making it smaller or permiing a higher value to stand but mitigating this to 
some degree by structuring the transaction in a way which can limit financial 
exposure over time. 
To take a simple case, a pharmaceutical product which is in development 
may have a tremendous potential value if it reaches the market, but it will have 
to pass many hurdles before it can generate sales and repay an investment. 
There are sophisticated risk assessment models which have been produced by 
Tus University in the USA and these have become accepted as an industry 

standard for valuations of products through the various stages of development. 
These ‘Tus’ or ‘DiMasi’ (named aer the originator) numbers estimate the 
probability of success – and conversely the likelihood of failure – at each stage 
of the development process. If such a product is being acquired it would be 
prudent to limit the exposure of the acquirer by factoring the risk component 
into the price paid by staging the total amount into what are referred to as 
milestone payments. These payment thresholds are typically associated with 
the clinical events recognized as decisive hurdles on the pathway to market. 
Although the numbers are adjusted from time to time by the Tus authors, the 
correlation of risk to development stage is broadly as follows: 
Preclinical: 10 per cent chance of success. 
Phase I (‘human volunteer’ or ‘first entry into man’ studies): 28 per 
cent chance of success. 
Phase II (safety and dose ranging studies): 50 per cent chance of 
Phase III (efficacy and comparative studies): 70 per cent chance of 
These numbers are variously interpreted and are given as either the chance 
of success or the probability of failure. However, as these numbers are calculated 
differently, although they should not be used synonymously, they frequently 
are. Another view which is quite oen taken by investors is that the later stages 
should have an ‘allowance’ factor for regulatory issues which go beyond the 
purely scientific, such as the relative performance of a product versus one already 
on the market, which may be insufficient to justify approval for marketing. As a 
rule of thumb, however, they serve the purpose of acting as a caution. Executives 
in early-stage companies are sometimes over-eager in their beliefs that their 
products are advanced because they have entered the clinic and are being tested 
in man, although a compound has come a long way by this stage it still has a 
highly perilous part of its journey ahead of it (see Figure 5.4). 
There is also an intrinsic risk of a product being withdrawn aer it has 
been approved for marketing. Typically this risk is at its peak in the first 3 years 
on the market as the number of patients in the general population exposed to 
the product rapidly increases and less frequent adverse events come to light. 
The risk of removal is, however, relatively very small and would usually be 
considered a normal business risk unless there is a history of failures among 
products of the same class. This has recently been highlighted by the discovery 
of an association of adverse cardiac events with COX2 inhibitors and then 

the same was noted with NSAID painkiller products as both affect the COX2 
receptor and consequently seem to have some tendency to increase the risk 
of heart aacks in some patients. This led to the withdrawal of Merck & Co’s 
Vioxx product, despite its having safely dosed millions of patients, to protect 
the few susceptible patients. 
When these risk-related factors are applied to the structure of a licensing 
transaction it is typically reflected in an initial payment followed by later, and 
sometimes ascending, series of payments following successful completion of 
each the clinical stages, and the safety database of the product increases in size 
up until the product is marketed. Aer this it is usual to include a schedule of 
royalty payments which provide the originator company with a share of the 
product’s success in the market. This structure serves the purpose of limiting 
risk. As the criteria for success at each milestone are achieved, value is added to 
the product and by deferring the payments the cost of financing the transaction 
is also reduced as each part of the full cost does not have to be paid until the 
associated risk has been dissipated and the value up-tick has been established. 
If however the product fails to achieve the milestone, the licensor is not liable for 
further payments. This general structure is therefore the most commonly found 
in licensing deals for early-stage and development-level products and because 
the risk is shared the eventual value of the deal can be substantial compared to 
a single early payment. In the case of product acquisitions by contrast all the 
1 2 3 
Figure 5.4 Probability of failure

risk is assumed immediately by the purchaser as a result acquisitions are oen 
associated with marketed products where the risk has been all but eliminated. 
Here the overall value of an acquisition is lower and the rationale for this is that 
the level of risk is reduced to the commercial component but the cost is immediate 
and entire. A licensing transaction by comparison structurally accounts for 
the scientific risk by limited payments in the initial stages and accommodates 
for the commercial risk by means of a royalty which is performance based. 
As market forecasts are very oen optimistic the likelihood of paying the full 
amount suggested by the deal terms in many cases is quite low. Where the 
product does become a blockbuster (commonly accepted to mean more than $1 
billion in annual sales) the royalty paid will be an appropriate reward for the 
scientific success being converted into market success. 
Combining these elements into a transaction with appropriate and 
symmetrical sharing of risk and reward constitutes a primary focus of business 
development and presents a significant challenge. The valuation components 
must be arranged in such a way as to reward the seller (or licensor) and protect 
the acquirer (or licensee) in a way which captures the inherent risks in the 
scientific sense and the commercial risk in the financial and marketing senses. 
This means rationalizing the views of all the various constituencies within 
both of the companies and finding the best and most workable solution. These 
structures are suitable to transactions between commercial companies, but what 
of licenses between companies and academic institutions? Here the structural 
elements need to address a different set of drivers for value. 
Universities in particular have moved from being solely centres of basic 
research towards a focus of product generation as a means to acquire wealth 
for the institution. This movement was spearheaded by the Massachuses 
Institute of Technology who have pioneered practices in technology transfer 
with the intention of supplementing the institute’s endowment and has had 
a heavy emphasis on health care. Other universities the world over have not 
been slow to follow this model and have initiated similar programs seeing 
health-care biotechnology in particular as a means to capture some of the value 
in their research. A great many companies have been started as spin-outs of 
university-generated technologies with the university itself retaining significant 
equity stakes in each of the companies and providing business development 
support to the companies in at least the early stages and sometimes through 
a related business school. This basic public finance serves as a source of 
products, technologies and research platforms for the pharmaceutical, and 
other, industries, but also gives a different aspect to the process of valuation 
of biomedical assets. The search for truly analytical means for a solution to 

the valuation problem seems to come naturally to the academic scene and has 
stimulated considerable research to try and substantiate the various commonly 
employed methods. However, from a practical perspective the utility of 
these models is limited due their being originated in the absence of a truly 
commercial partner in the valuation process, this skews the approach more 
toward maximization of financial return. A university has lile or no commercial 
agenda and so lacks a strategic component in the valuation method, with the 
result that the valuation is theoretical and not what someone else would actually 
pay. Dealing with universities, or indeed working from a university, can be 
challenging from a number of points of view in that a university’s technology 
transfer group frequently has limited access to market data and few resources 
to conduct qualitative or quantitative market research. As a result there can 
be markedly different assumptions of a market’s potential and very different 
expectations of the economics of a product within it and how this should drive 
the structure of the transaction required to license it.

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Structuring for Value CHAPTER 
The choice of deal structure, as has been outlined in the previous chapter, is 
extremely important in realizing value from the transaction. The simple examples 
set out before reflected the needs of a ‘plain vanilla’ licensing deal (named aer 
the ice cream which has no added sprinkles or decoration). However, there will 
always be a need for other structures to address more complex situations. This 
chapter will deal with the main types of structure found in the pharmaceutical 
industry; acquisitions, licenses and joint ventures. Each of these may take place 
in a wide variety of contexts and can be used to satisfy various objectives. In 
the research environment there will be a range of relationships between feefor-
service research contracts, where there is no assignment of rights between 
the parties, through to collaborative research where the parties may apportion 
intellectual property (IP) rights according to their needs or this might alternatively 
may be constructed as a true joint-venture in which there is co-ownership of the 
resultant IP and joint commercial exploitation. Moving forward to a product or 
clinical development context, a similar range of relationships can exist but may 
also include a division of labour and a transfer of rights between the parties for 
onward licensing to a dedicated development house that takes no role in the 
commercialization. This is unlike an integrated pharmaceutical company which 
may in-license a product at an early stage, develop and then market it. At the 
point of commercialization the opportunity exists to share rights to a product 
where the ownership may be retained yet there is a sharing of the sales effort and 
rewards which may be divided again between licensees in different territories or 
perhaps also different indications (see Figure 6.1). 
The extent to which a product can be shared really depends on the scale 
of the economics involved and the relative sizes of the parties. This will also 
reflect the culture of the companies which will also depend on the portfolio and 
their sales penetration abilities. Even a large multinational will have greater or 
lesser strengths across the world and could choose to partner a product for one 
geographical regional market or another to maximize their return through the 
best utilization of their resources. Individual subsidiaries nevertheless have to 

obey the dynamics of their own markets as well as trying to implement a global 
brand strategy, aer all the opportunity for an antibiotic will vary according to 
the prevalence of disease and patients’ access to medical care. 
The full array of possibilities will not, however, be followed by any particular 
company in the normal course of business and so for the purposes of this book the 
structures described will be grouped under main headings of ‘Licences’, ‘M&A’ 
and ‘Others’, always accepting that special circumstances may well require atypical 
solutions. In health-care markets the most frequent transaction type occurring in 
pharmaceutical business development is the product licence. This may be an outlicensing 
or an in-licensing but it should be noted that it is sometimes necessary to 
conduct one or more additional preparatory in-licensing deals prior to undertaking 
an out-licensing deal. The reasons for this are that freedom to operate needs to be 
established for the selected asset before you offer to license a product of your own. 
In order to achieve this it can be necessary to take a licence to technology from 
a university or inventor who owns intellectual property which dominates your 
product and so requires a de-blocking licence to grant freedom to operate. In the 
case where IP exists which could affect the rights of the licensee these so-called deblocking 
licences may be taken to secure limited rights to an enabling technology, 
a process or similar encumbrance. A licence of this kind is frequently non-exclusive 
North America 
Latin America 
Licence Sub-licence 
Figure 6.1 Distribution of licences

and this helps to reduce the cost which can be further improved where possible, 
by taking a licence in exchange for a one-time payment reducing the costs to the 
licensee and their assignees. Such a licence structure should also be as simple as 
possible and confer broad freedoms to use the process as required to develop 
and produce the product, and as noted above, it needs to contain the freedom to 
assign those rights as necessary to sub-licensees or acquirers of the product. Then, 
having established both the rights and freedoms to operate it will be possible to 
make an offer to out-license the product at full value. Similarly this process will be 
demanded by the licensee of such a product. 
Deal structures 
A licence is a permission from the owner of an asset to make use of the asset 
for specified purpose, period and in a defined geography. Other conditions 
Assets – Liabilities 
Future value 
Strategic value 
Product sales 
Development products 
Intellectual property licenses 
Market share 
Market entry 
Valuation components 
Redemption value 
DCF Net Present Value 
DCF Estimated NPV 
DCF Estimated NPV 
Figure 6.2 Valuation of an asset for sale

may be applied within the licence but the key fact is that the ownership of 
the asset remains with the licensor even in the case where a licence has been 
granted which is exclusive, perpetual and irrevocable as may be the case with 
a technology integrated into a final product as it otherwise could not function 
without it. 
The flexibility of a licence as opposed to ownership of an asset can be very 
broad. The terms of a licence may be wrien to suit the situation and can also 
vary over time as circumstances change. As already mentioned a licence may 
be exclusive between the two parties, permiing the licensee sole rights to the 
technology. Alternatively a non-exclusive licence can permit use of an asset 
which is a useful part of a product or even a complete product on a non-exclusive 
basis if this maximizes the return to the IP owner by increasing the competition 
for sales between several parties. As a result there is of course a premium to 
be paid for exclusivity and this is a major maer in many negotiations. A nonexclusive 
licence by contrast has lower value as it only gives freedom to operate 
rather than a competitive advantage as it confers no barrier to market entry over 
competitors. The choice between these two alternatives turns on whether the 
licensee requires protection and is willing to pay, or share, in the value that this 
brings. The selection therefore also becomes an integral part of the valuation of 
the opportunity and will be a fundamental assumption in the modelling of the 
product opportunity. 
A licence’s duration is for the most part specified to run to the end of the last 
patent protection available for the product and this may be defined at different 
levels such as active substance patents, method of use patents, patent extensions, 
formulation or other such protective mechanisms. Although these protections 
are highly regarded in the licensing of prescription medicines, licences for the 
use of brands are also highly sought aer in the non-prescription (or OTC – over 
the counter) medicines business, as in this case the licence duration may be for 
a longer period. The protection of a brand name, and so the value this confers, 
does not expire with the patent, as is generally the case for a prescription-only 
medicine where the rapid availability of lower-priced generic versions of a 
product remove the incentive for investing in promotion. Perpetual licences 
are largely restricted to technologies with a low intrinsic value but which make 
up a part of the finished and more valuable product. 
Exclusive licences may however be divided into geographic areas where a 
company which has a strong market presence but is restricted to a particular 
locality may be a good partner for a product. This is particularly so in specialty 
(typically hospital-based) medicines where a narrow prescriber base may mean 

that a company with a compatible portfolio and narrow focus can produce the 
best value from the product. In such a situation a series of exclusive licences 
may be granted to encompass the major markets of US, Europe and Japan as 
well as the emerging territories such as China and India where the recognition 
of foreign patents and licence rights through TRIPS and GATT are transforming 
the potential of those markets. 
The price of a licence is therefore related to its ability to maintain a barrier 
to competitive entry to a market. Thus the terms for granting a licence will be 
structured to reflect not only the overall value of a product but the risk and 
timing of the realization of that value. In such circumstances one-time single 
licence payments for most pharmaceutical products would prove far too 
expensive and risky for the licensee. The risk of possible regulatory restrictions 
on the product’s uses, the tractability of a market, the reimbursement hurdles 
and competitive environment can all have major negative effects on the sales 
potential of a product. As a result an upfront payment can either lose value for 
the licensor if it undervalues the asset or massively penalize the licensee if it 
underperforms. To counteract these risks staged payments using milestones 
and royalties are by far and away the best method of defraying the risk and 
ensuring an appropriate level of reward for the licensor. But this assumes that 
the licensor is able to withstand the deferment of their returns for many years. 
When estimating values it is worth remembering that while the development 
time for a product is in the order of 7 to 9 years before it reaches the market 
the time to reach peak sales can be as long again unless the marketing partner 
has the size to be able to mount simultaneous multi-country launches at a scale 
and power which can bring rapid market penetration. There are few companies 
which can mount this kind of effort with the consequence that most products 
will not see their aggregate peak until the patent life has all but expired, if they 
reach their potential peak sales target at all. 
Royalty rates have become a baleground in recent years as the industry’s 
dynamics have shied more and more towards in-licensing of compounds to 
fuel growth. Private equity investment has created a supply of independently 
researched and developed products from the biotechnology (biotech) industry. 
Although the name has stuck the products of the companies in this ‘biotech’ 
sector may or may not be actually derived from biotechnological sources. In 
any case the financing that the products receive through the use of risk capital 
(venture capital) requires a greater return than was the case 20 to 30 years ago 
when compounds discovered in universities were developed by established 
pharmaceutical companies funded by large capital reserves (and so with a 
lower cost of capital). The use of risk capital has accelerated the demand for 

returns and this is a major contributory factor to the pressure on negotiators in 
all licensing transactions who have to seek seemingly ever-increasing payments 
and royalties to provide a return to their investors. The old benchmarks for 
royalty percentages are being redrawn to accommodate to this new factor (and 
with regulatory hurdles also rising in an aempt to increase patient safety the 
earnings growth of the bigger companies is becoming harder to achieve), yet 
despite these increasing costs with the eventual dilution of earnings to preserve 
competitive status a greater share of each product’s earnings are being pledged to 
smaller companies to secure the rights. This innovation premium will no doubt 
find its correction point in time but with a 20-year base line for financial analysts 
to define the result it is not likely that this trend will change in the near future. 
A further possible division of a licence which has received aention is 
the concept of spliing the therapeutic indications that a product can be used 
to treat between different licensees. There will always be a debate about the 
wisdom of this approach because of the potential for cross-use of the product 
between disease indications and the requirement for consistent pricing. This 
may undermine the justification for investing in additional clinical studies with 
a consequent effect on the commercial value of such an approach. Even so, it 
may be possible to differentiate the products by specialized formulations. This 
can be a reasonable approach to generate more value from a product. However, 
this differentiation of form to satisfy the requirements for a separate product 
registration making it unlikely that one product form will be substituted easily 
for another (as might be the case of an ampoule for injection compared to a 
bole of eye drops) is now frequently complicated by the aitude of national 
reimbursement authorities. These authorities are becoming very intolerant 
of pricing differentials for formulations of products based on an individual 
molecule unless there is a very clear increase in the costs of producing one 
formulation over another. As a result a licensee of a second indication may find 
themselves tied to the price of the original product irrespective of their own 
cost base. This can have serious implications for the profit margin of both forms 
of the product and as a result the approach is questionable when considering 
licence opportunities. 
The flexibility this approach brings when applied to royalty rates means 
that it is possible to institute a differential approach to rates depending upon 
performance. Thresholds for performance can sit on either side of the product’s 
‘true’ sales forecast, allowing the provision for a step up in the royalty rate or 
a step down according to the desired reward structure. In fact a series of steps 
can be built into a tiered structure, which can give a steady improvement or a 
tailing off, and these modifications can act as an incentive for a company to sell 

more and so commit more resources. In the case of poor market performance, 
however, the licensor can be compensated by an increasing share of the smaller 
product sales value. These so-called ‘collar’ provisions may be applied only to 
each of the upside or downside conditions and they provide a mechanism to 
achieve equitability between the partners though the long and uncertain future 
of the product. 
A further and useful financial mechanism within the licensing arena that 
gives additional scope for adjustments in compensation are sales-related 
milestone payments where, without altering the underlying royalty rate, a 
threshold of say $50 million in sales can be recognized and this may act as 
a top-up to a lower initial royalty rate and act as the signal to trigger a new 
rate to be used. This combination of deferrals, incentives and rewards means 
that licensing will remain the most frequently used transaction structure in the 
pharmaceutical industry as it recognizes the intrinsic risk and reward that is 
characteristic of the market. 
A variation on the theme of licensing has emerged in the last 5 years where 
a combination of the features mentioned above are used by companies that 
have a broad portfolio of products but, for tactical reasons, need to concentrate 
their resources on only a few major products. In this situation the products 
which cannot receive adequate focus internally have been out-licensed to thirdparty 
companies for a fixed period in exchange for a share of their revenues. 
The arrangement permits the company to maintain the value of its asset and 
grant a licence limited to perhaps the period of 5 years, with the contracted 
right to recover the product. This can provide the means to assist the company 
on several fronts as the product sales can be consolidated into its balance 
sheet yet the company does not have to carry the overheads of a sales force 
and promotional costs beyond the fees included in the contract throughout the 
licence period during which the market share of the product is either defended 
or increased. This ‘fostering’ of the product may even be a useful precursor to 
a takeover of the marketing partner or, alternatively, if the licensing company’s 
performance with its major products is sufficient, the fostered product might 
be sold to the fostering company to generate additional cash. The fostering 
and licence-back structure makes use of time limitation, exclusivity and 
performance enhancement features to ensure the healthy growth of a product. 
When considered in the context of portfolio management this means that 
the company can to some extent ‘have its cake and eat it’. More will be said 
about creating and choosing such structural alternatives in the discussion 
of negotiation in Chapter 7, as each of the elements mentioned above has a 
bargaining value as well as an absolute value.

Alongside the issues of taking a licence for a product there are also 
opportunities to become a sublicensee for that product. In a master licence 
the right to sublicense is of great importance as this opens the opportunity to 
penetrate markets where a company does not have its own local presence. If 
the right to sublicense is not established in the initial contract the overall value 
of the products will be impaired. Depending on the status of the company 
taking the original licence the quality of the sublicensee may be critical, it is 
of note that many universities’ technology transfer departments are becoming 
more sensitive to this consideration. In any case it is important to establish 
whether there are flow-through royalties to come to the originator in the 
case of a sublicence or whether the sublicence royalties accrue to the licensee 
alone. When constructing the licence the difference in value between these two 
situations must be factored into the price. 
Acquisition should be considered in two major contexts: firstly the acquisition 
of products or other individual assets; secondly the acquisition of a company 
in total. This needs to be considered in a separate context because the risks and 
complexity of completing such transactions are significantly greater. 
Acquiring products has a number of implications beyond those of taking 
a licence. When a company acquires a product it also acquires any and all 
liabilities already associated with that product. These liabilities may include 
past damages inflicted on patients, environmental impacts and contingent 
issues associated with third-party contracts. Conversely, the value represented 
in the acquisition of a product lies in obtaining the full value from its revenue 
streams and having full control of any development issues. 
When making a product acquisition some of the major concerns are listed 
right and title 
manufacturing and technology transfer 
continuing value 
covenants and change of control provisions. 

It is a critical importance in undertaking an acquisition that the right and title 
of the vendor is established unequivocally. During the process of due diligence 
in the acquisition it is insufficient for the vendor to warrant ownership without 
severe penalties in the case of a mistake. Particularly in the area of biological 
agents, the massive increase in the number and complexity of patents filed to 
cover different parts of a biological process when compared to a small molecule 
product means that many patent litigation cases are now being brought against 
marketing companies with the intention of forcing a share of revenues from 
products which were previously believed to be unencumbered. An example 
of such a case where a so-called submarine patent (where the existence of 
the patent had not been notified to the market) occurred between Cambridge 
Antibody Technologies Ltd (CAT) and Abbo Laboratories and is indicative of 
the difficulties associated with biological products in general. 
Abbo had taken a licence to CAT’s antibody technology to create its 
product Humira for the treatment of rheumatoid arthritis, which was forecast 
to generate billions in sales. However, at the time of launching Humira, Abbo 
was notified by a small Australian biotech company called Peptech that Humira 
also required a licence to technology protected by Peptech’s patents. As the 
value of Humira was now established Peptech not surprisingly held out for a 
significant royalty payment rate, much more than would have been granted 
earlier in the product’s development when the risks were much higher. Abbo 
at first resisted the claims in court but eventually conceded that a licence was 
needed and negotiated this with Peptech. All of this would not have been of 
major note if Abbo had not also noticed that in their agreement with CAT 
that payment of any additional royalties surrounding the technology could be 
‘clawed back’ or offset from the commitment to CAT. Abbo then proposed 
to enforce this. CAT naturally objected to this and subsequently aer long 
litigation received a judgment which re-established their position. Although 
the claim and counter claims were ultimately resolved it was notable that 
there was a provision in CAT’s accounts for the year when the case was being 
pursued for .7 million for legal costs. The company has now been acquired 
by AstraZeneca and the royalty streams sold on to a financial third party; still, 
this case gives an indication of the impact that submarine patents can have. If 
Abbo had for some reason divested Humira before all this occured, all the 
issues which they had to deal with would have become the responsibility of the 
acquiring company. This story emphasizes the need for extreme care in making 
acquisitions in general and in the biotechnology sector in particular. There is 
still much to be seled in law regarding biological patents which will only be 
resolved through the establishment of case law and this will only occur as cases 
are brought to the courts with all the expense that this entails.

Furthermore it is not just submarine patents on IP that can cause 
problems. There may also be issues relating to manufacture, obligations 
secured against product rights which may include leases, covenants for loan 
guarantees and similar structures which can lurk in a company behind a 
product as an unseen liability. In certain cases a product or other assets of 
a company may not even be divested without the permission of a financial 
institution or equity holder who holds such a covenant or lien. This can mean 
a requirement to make a selement with that institution outside the terms of 
an acquisition and can add considerably to the costs of a transaction both in 
time and in money. 
Notwithstanding contractual issues there are practical considerations in 
the area of manufacturing which need to be taken into account as well. On 
a number of occasions I have come across the problem of the relocation of 
manufacturing as a requirement of a product acquisition. Where a product is 
being manufactured as a part of a multipurpose site, objections are frequently 
raised on the part of the group running the site that their capacity utilization 
will be affected so adversely as to make the site unprofitable. Although it 
is feasible to transfer manufacturing outside a company the impact of a 
transaction on the existing infrastructure can incur costs. These would need 
to be recovered from the acquirer and if they are too high could put them 
off. Such costs can usually be accounted for in the premium part of the 
product’s valuation without necessarily signalling the cause. Manufacturing 
can also provide impediments to a transaction by having dedicated resources 
required for a process which cannot be shared with the acquirer. If this relates 
to hardware this would not ordinarily be a problem, but I was once involved 
in a situation requiring a technology transfer agreement where the reactor 
vessels required to make the product had to be of steel of sufficiently high 
quality to withstand the reagents used in the reactions. Because of this high 
quality the lead time to replicate them was 2 years. However, there was a 
corporate imperative to close the deal immediately. In the period before the 
new vessels could be produced and installed the existing manufacturing 
capacity would have to be used to serve two companies not one but, with two 
companies promoting the product the demand had doubled and so, as the 
vendor, we were required to ration supplies to our own company in order to 
satisfy the contract with the acquirer. Hence, remember that when assessing 
the costs and implications of an acquisition from either side of a deal the 
manufacturing issues deserve intimate aention as they can be can be very 
difficult to resolve.

It is oen the case that trademarks receive less aention than they deserve as 
I found many years ago when I was consulting to a firm in the animal health 
market. The firm had acquired an anthelminthic product for the treatment of 
worms in sheep, goats and camels. The product was principally sold to herders 
in the Middle East. The product range had been recently acquired and it was not 
until the new owner saw the sales figures for the first half year that they realized 
something was going drastically wrong. As a part of the acquisition plan the 
company had decided to update all the brand packaging to include their name 
and corporate trade dress; the salesmen had dutifully gone out with the newly 
packaged products during the dry season to oases on the migration trail, and 
in time-honoured fashion when the herders gathered at the marketplace each 
company’s representative had stood up on a dais and held up their product 
for display to the customers who would come forward and buy each of the 
products they wanted. Needless to say the newly repackaged product received 
no recognition because the trademark (a picture of a camel) had gone. None 
of the herders had ever known the name of the product, which was wrien in 
English: they only bought the product because they knew the design on the 
packet, and without that the product had no market as it had lost its brand. The 
company in question had not bothered to acquire the trademarks as they had 
planned to change them and they were forced to go back and renegotiate rights 
to the trademarks, which obviously cost much more aer the event, when the 
seller realized their value, than would have been the case if they had been 
included in the first place. 
At a recent business development course I related this story and aerwards 
I was told by a physician that when he had started in a primary care practise 
in Germany he had been in a dispensing group and, when he made his first 
prescribing choices, as he did not know many products at that stage he would 
most oen go for products from a manufacturer he knew to be good. As a 
consequence most of his patients were treated with the whole range of products 
from Merck & Co. as he had learned his pharmacology with the manual that 
they produced and which he kept at his bedside during revision. This just goes 
to show that whether the customer is a sophisticated Western physician or a 
simple herdsman the power of the trademark cannot be ignored. 
In acquiring a product which has been marketed or co-developed there may be 
some licenses with persisting dependent rights to the product and so obligation 
to the sublicensees. Indeed some of these may be competitors at a global level 

yet become licensees on a regional basis through the acquisition of the product, 
a situation which may not be compatible with your own policies. Careful 
study of these licence agreements is required to understand whether or not 
you may terminate these agreements post-acquisition and under what terms. 
If nothing exists in the contract the only alternative may be to offer to buy out 
such agreements. This may require considerable time in negotiations as you 
will probably have an unwilling counterparty to deal with. There will be some 
significant rights within contracts of this kind, such as a lengthy cancellation 
period, which can cause considerable disruption to global plans such as a 
rebranding programme. 
A change of control provision in a contract states that if the ownership of a 
product or the licensor of a product is acquired by a third party that the licensee 
or other contracted party may have the right to renegotiate or terminate the 
contract. If the value of the product rests on their provision of services this 
may have significant implications for the value of the asset. Moreover change 
of control provisions in a contract may be fully specified or, depending on 
the language used, may be implied and in either case this requires that the 
acquisition process is managed with extreme care to preserve the value in the 
product. The issue of change of control relates not only to certain licensees 
and their rights but through them to the overall continuing value of the asset 
itself. When an asset changes hands it is not only the sublicensees who have 
a say: wholesalers, distributors, agents and representatives may each take 
the opportunity to try and revise and improve the terms of their relationship 
with your company through their contract. Another transaction in which I was 
involved required the transfer of a product from one company to another which 
included a dedicated sales force in the US whose employment, on paper at least, 
was to be transferred with the product to the new owner. However, at the same 
time as we were trying to execute this transaction many of the major companies 
in the US had started recruitment drives and were paying tens of thousands 
of dollars in signing-on bonuses for experienced representatives. As soon as 
the field force we wanted to transfer found that their employer was to change 
many took the opportunity to jump ship. Our challenge was to maintain the 
value of the asset and to do this we had to continually replace these experienced 
representatives to maintain the field coverage of the hospitals and so the sales. 
Wherever possible we matched the signing-on bonuses by paying retaining 
bonuses rather than be le with nothing but the new recruits which was a very 
costly exercise. Simultaneously the management of the contract field force 
which had been operating alongside the in-house representative decided to try 

and renegotiate their terms which further compounded the problem. Changes 
of control are most definitely best dealt with when seing up a contract rather 
than fixing when the deal is in full swing. 
The future value of a product which is the subject of a licence has a different 
character when compared to the method for valuing a product for sale. A vendor 
will need to add a premium to the underlying cash flows as the total value of 
the product is being transferred not just the sales line or profit contribution and 
this is likely to have a persisting value beyond a reasonable forecast period. 
The market at present has seen a steady increase in prices paid for products at 
acquisition as a very active market has emerged in re-profiling and relaunching 
products. Older products which have a lengthy sales history have usually been 
valued on a multiple of sales using a discounted cash flow model. The multiple 
chosen depends on the slope of the sales curve and may vary between one times 
the last year’s sales up to six times that amount if the product is still growing. 
In addition it is common practice to aach a ‘terminal value’ to the multiple to 
make up the total purchase price. In a discounted cash flow valuation, the cash 
flow is projected for each year into the future for a number of years (usually 
five – aer that time individual annual cash flows cannot be forecast with any 
reasonable accuracy). At that point, rather than aempting to forecast the cash 
flow for each individual year, a single value is used to represent the discounted 
value of the subsequent cash flows before a multiple of the last forecast year’s 
sales – oen between two- to three-fold is calculated. This single value is called 
the ‘terminal value’. 
The terminal value of a marketed product may represent a reasonable 
proportion of the overall valuation. This is in contrast to the terminal value of a 
piece of manufacturing equipment at the end of its useful life, which is usually 
taken to be its salvage value, oen less than 10 per cent of the current value. By 
contrast, the terminal value associated with a product whose sales are not in steep 
decline may be more than 50 per cent of the total present value. For this reason, 
the terminal value calculation is oen highly debated when performing such a 
valuation. When using this valuation technique, however, the fundamental issue 
is the strength of the forecast of sales which itself will depend on the robustness 
of the market model. The final figure asked for a product which is to be acquired 
may therefore be relatively high and so may not aract many bidders, which is a 
requirement for achieving good value in a sale. 
As most large companies are continuously faced with the need to manage 
their portfolios of products to improve the average maturity and so corporate 
growth, they are usually seeking ways to divest themselves of older products. 

One way of modifying the hurdle of the price for such a product which, 
being older will be less aractive to strong, well-funded companies and 
more aractive to smaller but less well-funded firms, is to change the basis of 
payment for the product. The ability of smaller companies to do a ‘take-out’ 
purchase for cash will quite oen be severely restricted by a lack of funds and 
the ability to borrow the large amounts required. Consequently a more typical 
route is to use an ‘earn-out’ formula (see Figure 6.3) by which, aer making 
a down-payment, the acquiring company will each year return a share of 
the profits on a depreciating basis until they have discharged the cost of the 
acquisition. In this way the acquiring company can use the asset as the means 
to leverage its own purchase. Naturally the vendor must satisfy themselves 
that the acquirer has the ability to achieve their projected sales figures and 
this can, on occasion, lead them to accept a lower offer from a ‘safer’ bidder in 
preference to a more ambitious bid from a less substantial company. This part 
of the valuation equation will rely upon rigorous due diligence by the vendor 
rather than that of the acquirer. 
As mentioned above the market for these products has become very active 
through the advent of many ‘specialty pharma’ companies in the last 10 years 
and this has meant that product assets are now rarely made available without 
an auction process which in itself can be a challenging undertaking. 
The issues which may be encountered in the due diligence process during 
product acquisitions can be many and varied. Probably the most frequently 
1 2 3 4 5 6 
Single payment: Risk = 0% 
Equal payments + 20% 
Declining return risk % 
Figure 6.3 Take-out versus earn-out value

encountered is poor documentation and this is the source of some of the 
gravest errors. As products become older and of less importance to a company, 
the rigour with which documentation is pursued falls off dramatically and 
understandably this is not an area which aracts much investment or aention. 
As a result, when trying to research the issues of contract liabilities, patent 
maintenance, manufacturing batch records and customer sales records, the lack 
of documentation can be daunting but persistence and patience will enable you 
to avoid inheriting liabilities with the product. 
Another issue which can impair a purchase is the maintenance of inventory. 
While finished product inventory is paramount it is no less important to aend 
to supply chain components and materials. Particularly when a product has 
been scheduled for divestment, production managers will become hesitant to 
place future orders for components for fear of building up inventory that will 
have to be wrien off. Once there is a reduction in order frequency or size 
the component manufacturers on noting this will reduce their own inventories 
accordingly which may continue until people are waiting for orders before 
starting a batch run with the result that the whole chain slows and becomes 
unstable. This can lead to a hiccup in supplies of say active produce ingredients 
(APIs) reaching the factory and so disruption of the supply chain. Control of the 
information regarding a product sale from business development is therefore 
important for managing this aspect of product value. When acquiring a product 
it is just as necessary to ensure that the supply chain of the target product is 
intact all the way back to basic materials. This is also true of trade dressed 
materials as once the product has changed hands any existing stock in its old 
packaging may need to be re-dressed and even repackaged which will have a 
bearing on costs. One temporary solution can be to over-sticker existing stock 
but regulatory authorities are reluctant to permit this continuing for too long. 
If any special machinery is to be transferred with the product then a 
specialist must check the age, state of repair and mobility of this equipment 
and that the final delivery facility has the capacity to contain it. During one 
acquisition, the head of manufacturing was only just in time in noticing that the 
incoming machines were actually half a metre taller than the headroom in the 
facility where they were due to be delivered and as a result the manufacturing 
had to be re-sited, and this brought unbudgeted costs. 
It is not just machines which have surprises in store. During the due diligence 
for a financial investment we found that one of the portfolio companies had made 
an acquisition in which the formulation process was to be transferred from the US 
to a European facility. Whilst the transfer was quickly achieved unfortunately the 

process could not be made to produce product which would pass quality control 
despite following the standard operating procedures laid down to the leer. 
It was only when we interviewed a retired member of staff from the acquired 
company that we found that an additional step had been introduced without 
documentation and that if it were not performed the product formulation would 
separate aer mixing. The know-how for such an operation is not necessarily 
contained within a due diligence data room. Site visits and interviews with 
manufacturing staff are strongly recommended in these circumstances. 
Another component of the product acquisition is the goodwill that goes with 
the brand. I discussed this above in the example of the camel worm powder. 
That story, while it points out the pitfalls of overlooking such aributes, also 
supports the notion that goodwill, although intangible, has real value. However, 
goodwill quite oen also represents the intangible premium desired by the 
owners of the selling company. In order to ascertain the ‘true’ value of this 
goodwill rather than the opinion of the perceived and sometimes egotistically 
motivated value of the owners, it is worth interviewing customers to find out 
whether there is any real goodwill or whether this can be a bargaining point in 
the negotiation of the price of the acquisition. 
At closing it is necessary to ensure that the transaction is completed 
in total, or ‘perfected’ as it is sometimes called. This requires that there is a 
comprehensive exchange of documents and an overseeing of certain specific 
activities. The first of these is the re-registration of the marketing authorizations, 
manufacturing licences and pharmaco-vigilance activities. Secondly an audit 
of the inventory management process is carried out and, where necessary, 
contracts and representation are secured in all territories. As a part of this 
process it is advisable to set up an escrow account held by a third party such 
as a bank to compensate the vendor in the case of any default on the part of the 
acquirer or sometimes vice versa. Performance criteria can be set for closing, 
inventory control, technology transfer and the provision of know-how. If the 
product has been sold on an earn-out basis there should also be a penalty for 
underperformance in the marketplace. The escrow account ensures that funds 
are available for compensation according to contracted formulae and avoid 
disputes of interpretation post-closure. 
Company acquisitions differ from product acquisitions in the complexity of 
the transaction and the separate and overlying complications associated with 
equity ownership which itself is usually divided amongst many shareholders 
with different motivations. A primary consideration in considering a company 

acquisition is whether the company is publicly traded or privately held. In either 
case as discussions progress it is necessary to recognize that shareholders have 
rights to information from their management. In the past there have been a 
number of instances where company managements have entertained bids from 
potential acquirers without informing more than a few of the shareholder base 
and the demands of good corporate governance require equal disclosure. Hence 
even as the potential acquirer it is necessary to ensure that the counterparty is 
following the rules on their side to protect the possible deal. In an increasingly 
litigious market and with corporate governance requiring transparency at all 
levels the responsibility for disclosure goes equally for both sides of the table. In 
consequence and in particular among the larger companies there is a constant 
potential for conflict between the interests of boards with the responsibility to 
maximize shareholder value and the shareholders themselves who will have 
many different views on what constitutes value at any given time. 
When considering an acquisition of a publicly traded company it is necessary 
to understand the listing rules of the markets on which they trade. These rules 
may not be familiar to individuals and so local advice should be sought to 
establish whether each market has different rules and what consequences 
these may have for a given transaction. It is also worth remembering that 
delisting threshold requirements, that is what percentage of total shares must 
be controlled by the acquiring company may also vary between markets. In 
Germany for instance the threshold has required that greater than 90 per cent 
ownership of shares be controlled before the target company can be de-listed 
from its existing exchange. This has compared unfavourably with London 
where a threshold of 70 per cent has been more common. There is another a 
threshold which affects the level of ownership required to be able to force a 
‘squeeze-out’ of minority shareholders to obtain 100 per cent ownership of a 
company which can be as high as 75 per cent before a tender offer must be 
accepted by the minority shareholders. 
There are many options for financing company acquisitions. The simplest 
may be to utilize retained earnings in the company but this should be 
compared with borrowing or ‘leverage’ as it is called as the costs of borrowing 
can have less impact on the company if it maintains its financial reserves and 
services the debt from revenue. This is an aractive option for companies 
with steady growth in earnings in excess of the amount needed to service 
debts. The major alternative to a cash purchase is to offer stock either directly 
to the shareholders of the target company, possibly with warrants or options 
to secure their value (the act as a guarantee of value), or to make a ‘secondary 
offering’ of new shares to the capital markets to raise more cash without 

borrowing. There are a huge number of variations on these two basic models 
which suit different companies at different times and these are chosen based 
on their relative risks and costs. 
Another chance to finance an acquisition may lie in the utilization of assets 
within either of the companies which will not be required in the merged company. 
These assets may either be sold or potentially spun out as a new company and 
floated by initial public offering (IPO) to provide the funds, or, alternatively, 
it might first be funded by private equity. Moreover the opportunity to use 
an earn-out structure for a management buy-out (an MBO) which, as in the 
product acquisition, can defer the economics of the transaction for the acquirers 
might be considered as might the use of a special purpose vehicle (SPV) to act 
as a temporary and virtual company to develop assets. Although use of SPVs 
became questionable due to certain abuses some years ago these structures can 
still be put to good use if the governance is transparent. In addition to these 
options a reverse merger into a ‘shell’ company is a possibility. These come 
about because in such a high risk market there are always situations where 
companies have achieved significant funding for promising scientific ideas, yet 
the research has failed. These companies become the target of reverse mergers 
when technology rich suitor companies with lile cash go seeking a compatible 
partner who has cash but due to the research failure no products. The resulting 
merger can create value where before there was none. 
Sources of finance for company acquisitions as mentioned above can be 
from reserves or maybe taken a senior or subordinated debt. Alternatively a 
bond may be issued with various characteristics offering an annuity, a balloon 
payment or a combination of the two. A variety of convertible structures have 
been utilized for this purpose as asset sales and the use of the target’s balance 
sheet. There has also been a place for royalty transactions where the futurevalue 
of product cash flows are securitized to provide capital in the near term 
to achieve a company acquisition. 
When considering equity transactions some of the most significant issues to 
be considered are the valuation of the shares offered at the time of the offer and 
then at that date of closing which can vary, sometimes quite widely. Another 
factor which can have a bearing on the araction of an equity transaction are the 
requirements for ‘lock-up’ periods where shares cannot be traded for a defined 
time following the closing of the transaction. This can be a serious concern 
to private equity holders as there is an unknowable quantity of risk implied 
by waiting for the lock-up period to end and this will induce a very cautious 
approach to valuation as a result. Furthermore the ownership structure of a 

company can lead to a number of additional negotiations if the share classes 
owned by different shareholders have different rights from each other. There may 
be preference rights associated with certain classes of share and these may include 
independent negotiating rights in the case of an acquisition. It can also be the case 
that warrants to buy shares and granted options may have a right to respectively 
be exercised or vest in the case of acquisition and that this can affect the intrinsic 
valuation of the company unless and until these interests are satisfied. 
On a more general level, when considering the due diligence maers 
involved in a company acquisition it is always advisable to take counsel from 
local lawyers in the case of trans-national transactions. Reasons for this include 
the fact that many European countries still have different waiting periods for 
transaction closings to occur and different regulations requiring publications 
and notifications of a change of ownership. Each of these can invalidate a 
transaction and if they are not completed in a timely fashion and the asset may 
become impaired due to disruptions in supply or representation. Trades unions 
in some countries can exercise considerable rights on behalf of the employees 
and can block or modify arrangements negotiated between companies and 
their owners if they feel that their members are being disadvantaged. They may 
also delay the closure of a transaction if this might prove to be a bargaining 
tool for pay and conditions aer the merger. If it is the case that staff will be 
made redundant the obligations of the employer need to be well understood. In 
France for instance it is still the case that the social contract requires that a person 
being made redundant must have their social security contributions paid up 
until their retirement date by the employer if the redundancy is forced. In the 
past several US companies have found this information out too late to prevent 
having provided a pension for many 30-year-olds. A newly empowered issue 
of major significance to acquisitions are the environmental obligations which 
become the responsibility of the acquiring company. An environmental impact 
study of the company’s current activities should be undertaken in every case 
as a maer of urgency. Strict liability for retrospective environmental damage 
is coming into force throughout Europe and the US is soon to follow suit. The 
costs of land remediation, water remediation and consequential damages have 
yet to be estimated in a pharmaceutical context but if the example provided by 
the liability claims for adverse clinical events is followed the amounts involved 
could be very high indeed. 
When acquiring assets outside of Europe and the US it is also an absolute 
requirement to establish that the land the site stands in is in the ownership 
of the company. There have been several instances where foreign acquisitions 
have been made only to find that the asset is in fact leased and not owned. 

In many other instances all over Europe and the Far East at the current time 
companies are also receiving funds from regional grants, loans which are 
secured against covenants to remain in one location for a number of years and 
other similar constraints designed to protect local investment. When conducting 
due diligence in these circumstances it is always necessary to look for these 
potential problems. 
Closing a company acquisition takes a considerable effort in human 
resources, time and legal fees. In order that this work is successful or at 
least protected from failure a remedial mechanism needs to be put in place 
to deal with issues which arise aer the closing has occurred. These may be 
in the form of contracts as in the right to make clawbacks in the case that a 
warranty or representation was unfounded. This may lead to the imposition of 
penalties to be taken from an escrow account if the assets have proved not to 
have the represented worth. As always in closing a transaction it is an absolute 
requirement to ensure that all assignments and registrations necessary for the 
perfection of the transaction are undertaken. 
Other deal structures 
Among the other deals structures which are available are joint ventures, 
distribution agreements, agency agreements, option agreements and special 
purpose vehicles. Both distribution and agency agreements are in effect special 
kinds of licence but they lack the commitment from the licensor to maintain 
their relationship in the event that performance of the deal criteria are not met. 
The relationship in an agency agreement is stronger than that for a distributor 
and, as the name suggests, the agent actively promotes the product in exchange 
for a proportion of the sales revenue. In most distribution agreements the 
relationship is not as close as the distributor takes less of an active part in the 
promotion of the product. Distributors will typically include the product in a 
catalogue carried on behalf of a number of clients. Both relationships, however, 
require the distributor or agent to carry a minimum level of stock, to meet 
minimum sales criteria and to maintain customer records. The main difference 
between these types of agreements and a full licence is that distribution 
agreements are easily severable, oen merely by notifying the distributor 
and waiting for the notice period stipulated in the contract to expire. Agency 
agreements being closer contain many more protections for the agent in the 
event of underperformance. The agent also will have incentives and a direct 
relationship with the marketing group of the principal. In other respects the 
rights and duties of the two parties in either agreement structure can be similar 
to those under a licence.

Joint ventures may be initiated for a variety of purposes and in the pharmaceutical 
industry one of the more common reasons for a joint venture is a research 
collaboration. This then begins to generate novel intellectual property which 
can become the object of a potentially valuable commercial venture. However, 
the reason for forming a joint venture is that there is a dependency between the 
two parties by the sharing of skills, expertise or resources which neither has 
alone. The sharing of the costs and risks can make sense in such a speculative 
venture. Yet there are complications in such an arrangement which need to be 
considered before proposing a joint venture. 
One of the most contentious of these issues is: who has control? Many 
joint ventures are started on the basis of a 50:50 ownership and because of 
this later run into problems if the owners disagree about the future direction 
of the venture. This can lead to the dissolution of the venture with one party 
buying out the other – which can itself become a complex transaction. In other 
situations joint ventures have been made where one partner has a dominating 
share a 51:49 relationship. I was involved in one of these during the 1980s. 
Unfortunate disagreements at board level frequently spilled into the operating 
business making commercial success difficult to achieve. It was only when the 
51 per cent partner seized control and insisted on the company being operated 
as a subsidiary that some kind of order was restored. Even then the constraints 
of operating with such a spilt at the top meant that, aer a few years, as the 
venture was situated in the territory of the 49 per cent partner, it was sold back 
to them and a separate subsidiary started by the 51 per cent partner. 
On a commercial basis therefore joint ventures can be extraordinarily 
difficult to manage without a complete accord between the partners. Even a 
successful joint venture such as the AstraMerck joint venture created for the 
launch and promotion of Prilosec (omeprezole) in the US (which created a brand 
leader) had major consequences at the programmed end of the agreement: the 
break-up costs were a reported $3.3 billion in a compensation package to Merck, 
which came at a difficult time for AstraZeneca. All joint ventures therefore are 
fraught with problems and need very careful consideration before selecting 
this as the preferred structure compared to the many others available. 
Another structure which has come into vogue in the last few years is the 
granting or taking of an option to a development-level product. The concept 
behind such an option is the provision of a fixed level of cash which secures the 
product for the partner but does not obligate it to either take the product or fund 

it further. Yet having this option prevents the product falling into the hands of 
a competitor if it proves to be of high worth as its development programme 
unfolds. Genentech granted options to Roche on its pipeline of products: as 
each product finishes its proof of concept studies Roche may exercise its option 
to license the products on a first refusal basis. Similarly Novartis paid $50 
million to Idenix for an option to license a Phase II compound, and a smaller 
amount to Morphosys for options to pipeline products in the recent past. There 
are advantages to both parties because of the lack of commitment and the 
provision of funds; however, if the option is not exercised by the partnering 
company this may adversely affect the future worth as it may raise questions 
about the motive of the partner in abandoning a significant investment, even if 
the grounds for doing so were of a purely commercial nature. 
A special purpose vehicle (SPV) uses a separate legal entity to aggregate the 
assets, money and people required to perform a specific project. The advantage 
of this kind of structure is that people working for the vehicle need not be 
located in any specific place nor even do they need to have their employment 
contracts assigned to the vehicle. This may avoid costly infrastructure changes 
and pension scheme disruptions yet reassigns the newly created assets to 
new ownership. It can be particularly useful where a team whom a company 
wishes to retain for future projects might otherwise have to be redeployed or 
released. The objective of such an SPV can be to develop a specific product 
or portfolio without the disruption of seing up a wholly new company. 
The project or products in the SPV may be bought or sold independently 
from the main company as it is the vehicle which owns the IP contained 
within it. Furthermore the vehicle may be sold in total, or might be floated 
independently on a stock exchange to become a new and separate company. 
At the inception funding can be provided by private investors or banks 
without affecting the equity holdings of the parent company or its degree of 
leverage, leaving its role as an investor in-kind through the contribution of 
its IP. When the venture is sold or the products are acquired, maybe by the 
original parent company, the value created is released to the investors. Figure 
6.4 indicates the general structure of such a vehicle. 
It is worth noting that along with the risk the control of the development 
must be passed to the SPV’s management. The transparency this affords ensures 
that the legal issues affecting some past SPVs which caused problems though 
inappropriate governance can be overcome.

Figure 6.4 Special purpose vehicle 
Fund receives contingent put right 
for notes at fixed IRR 
Cash and/or stock: 
contributed to vehicle
- R&D contract to 
develop vehicle’s 
- Option to call 
vehicle stock 
- €x million 
initial equity 
- €y million in 
- Callable common stock 
- Warrants to purchase pharma shares 
Technology/IP licences 
- Vehicle receives % of 
- Vehicle funds part of 
R&D and manages 
commercial affairs 
- R&D subcontracted to 
pharma or chosen 3rd 
Pharma Fund

In considering which of these structures suits your company best is 
important to consider the following issues: 
resource comparison 
portfolio fit 
financial strength 
management depth 
dependence on success. 
The balance between these issues will determine which structure fits the 
company, both now and in the future. As a company grows it will be able to 
enter into agreements utilizing a number of different structures. Therefore its 
management needs to have the skills and information to choose and use the 
best structures to complement their existing situation. As a result monitoring 
of the use of resources, the fit with a company’s existing portfolio including its 
own and its in-licensed products, the network of relationships the company 
can manage and the degree and a balance of risk across that portfolio need to 
be continuously maintained and updated and these tasks sit well within the 
remit of a business development function. 

Due Diligence and 
Due diligence 
Before it is possible to enter full negotiations with a company or institution for 
the rights to a product or technology it is necessary to establish that the claims 
made for that asset are both true in the sense of being represented honestly 
and that the scientific basis and regulatory requirements have been satisfied 
appropriately. Moreover it is necessary to establish that the company has right 
and title to the asset without encumbrances. The process by which this is done 
is generally referred to as ‘due diligence’. 
In preparing for due diligence both sides of the transaction need to collect 
and collate the information which will be required by the counterparty to 
establish all the various points needed to close the transaction. The general 
categories of information required relate to items under the headings: 
intellectual property 
contractual relations 
human resources 
ownership structure 
operational liabilities and assets 
business plan. 
Each of these items will have a variety of aspects suited to the individual 
case so, for instance, IP relates to patents owned by the company or university 
and any third-party patents that have had to be licensed, which the new IP 
depends upon for freedom to operate. A list of the items which one would 
expect to provide or receive during a due diligence process for owned patents 
might be: 
patent numbers 

summary of claims 
relationship between claims 
issue dates, expiry dates, potential supplementary protections 
oppositions and challenges (previous and existing) 
a schedule of extensions to be filed. 
For licensed-in patents the list would also be: 
licensed-in contracts 
patent numbers 
summary of claims 
relation between claims 
issue dates, expiry dates, potential supplementary protections 
oppositions and challenges (previous and existing) 
a schedule of extensions to be filed. 
In establishing a due diligence process it is quite usual to create a ‘data room’ 
where copies of all the relevant documents are stored in an archive which is 
referenced just as in a library for easy access. The data room should be isolated 
and preferably equipped with desks for the visiting due diligence team to be 
seated so that they can use the data room like the reading room of a library. 
The process of giving and receiving data in a project is streamlined by having a 
symmetrical understanding between the parties and this is best achieved by the 
exchange of a due diligence requirements list prior to a physical visit. In this 
way any outstanding maers can be researched and appropriate data located 
by the providing party beforehand. On the topic of contractual relationships 
these might relate to: 
academic collaborations 
non-government organizations 

supply and manufacturing 
clinical research organizations 
And these should contain details of the costs and revenues related to each 
Furthermore, for each contract it will be necessary to have a record of: 
the name of the counterparty 
the type of contract 
jurisdiction (that is country law) 
contract end date 
summary of key issues 
change of control consequences 
effect of competition and exclusivity 
and a full copy of the contract and any codicils or addenda. 
In particular where concerning a company acquisition the human resources 
description should contain: 
an organization chart 
a list of the personnel including their: 
– function and role 
– entry date 
– remuneration schedule 
contracts for key personnel 
special issues such as staff with important knowledge which could 
reduce the value of the company if they are not retained. 
Additionally, in the instance of a company acquisition, the ownership 
structure should be explained including the: 
capitalization table 
share classes if any 

shareholders’ agreement 
It may be that due to the sensitivity of personal data and market-sensitive 
data some of these items should be held separately from the data room under 
the control of the legal department and available only to qualified individuals 
in the counterparty’s team, even when a confidentiality agreement is in place. 
Although the due diligence team will be constrained to silence issues such 
as remuneration can stimulate comments which can be unhelpful later in a 
The operational liabilities and assets of the company should include all 
contractual, legal and financial commitments both on and off the balance sheet 
such as: 
bank loans 
bank guarantees 
escrow accounts 
It should also include a list of all assets including: 
financial assets (shares and other financial instruments) 
tangible assets 
intangible assets (brands, trademarks and so on). 
Depending on the circumstances the business plan for a product or for a 
company in total should be provided including but not limited to: 
sales histories 
sales forecasts 
inventory accounts 
profit and loss (by product) 
clinical development plans 
competition analysis 

contingent issues such as manufacturing, supply chain 
market models and forecasts. 
The due diligence process therefore requires the exchange of the detailed 
lists that are appropriate to the particular transaction and then the construction 
of teams on both sides which can both ask the relevant questions from their own 
speciality and receive the answers from the appropriate source on the other 
side. Such a team may include representatives from research, manufacturing, 
finance, marketing and clinical development as well as the business development 
operatives. The business development function should lead the team and have 
authority over the other functions as business development will be in charge 
of maintaining coherence during the transaction process. As such the team 
should be briefed by business development on the strategic issues which have 
been authorized by senior management in the company. These will include 
the degree of engagement and the commitment of the company to completing 
the transaction, and its relative worth. As a consequence the team selection 
needs to be made by business development, who should choose people from 
each speciality with the correct and sufficient experience to undertake the 
task. It may sometimes also be useful for a speciality to ‘double team’ in order 
for newer members of that speciality to gain experience in performing due 
diligence under the guidance of a more senior and experienced person before 
operating alone later. 
Of crucial importance is that during the process of due diligence only one 
‘face and voice’ is presented to the counterparty, there is always a risk that 
during the due diligence process individuals engage in conversations on a 
one-to-one basis which are then not shared with the remainder of the team. 
It is mandatory that all communications are noted during due diligence and 
reported back to the other members of the team throughout the process. It is 
the responsibility of the business development leader to ensure that all required 
information is logged, recorded and communicated. 
The due diligence process may be conducted in several parts; indeed, it 
may take place over a number of months and at several different locations. 
Consequently, collation of the knowledge gathered into an aggregate report 
which can become part of the archive of the transaction is of the highest 
importance. As indicated above the structure of this report can be structured on 
the on-going checklist of items of information which will be required in order 
to complete the transaction. It is also quite likely that the due diligence process 
cannot be completed merely between the two parties themselves. Third-party 
validation through market research, expert opinion and other professional 

bodies such as accountants, auditors, credit agencies and others may be 
required. The purpose of this due diligence is to protect the company’s interest 
from the consequences of an incomplete or imperfect transaction. There are 
multiple examples of companies having finished transactions only to find that 
the asset they have acquired or licensed is impaired by unforeseen liabilities, 
issues with manufacturers or other commercial limitations which would have 
been exposed if the due diligence performed had been broadly based rather 
than overly concentrated on scientific issues alone. 
Structuring due diligence into different phases will be useful. They might 
include initial due diligence, which establishes the key issues for the transaction. 
Incidental, trivial or standard issues can be le as they can be checked in detail 
later and only when the parties have commied to the transaction. This spares 
the costs of engaging external counsel or financial advisors for opinions and 
validations until it is sure that the investment in their time will be worthwhile. 
It is therefore useful on each occasion to decide what are likely to be the critical 
issues for the specific transaction and to ensure that these are dealt with early 
in the process. 
As the due diligence progresses the team should be brought together 
regularly and debriefed by the business development leader. At this meeting 
a list of items which are either unresolved or unsatisfactory should be made, 
building up a list of issues which need to be included in the term sheet and will 
later be proposed to the counterparty as a part of the negotiation process. If 
there are impairments, uncertainties or liabilities which are not ‘show-stoppers’ 
or ‘deal breakers’ these can be factored into the term sheet either by a reduction 
in the valuation, or perhaps as a contingent offset to the cost which can be 
applied to the valuation of the asset if it becomes relevant. In the same way any 
other sort of liability may be treated on a contingency basis. If an event may not 
occur or if the outcome is not acceptable this possibility can be foreseen in the 
contract and the contingent actions stipulated. 
The due diligence process provides an inventory of facts around which the 
negotiation can be conducted. In seing out these facts there is a great similarity 
between the creation of a contract and the creation of a computer program. In a 
computer program the subroutines are constructed from a series of declarations 
which then become the variables against which the operators are applied. The 
typical structure of ‘if, then, else’ operators found in a computer program using 
a language like Basic, can deal with even complex relationships between facts. 
Due diligence establishes both the existence of a fact which appears in the 

contract as declaration and its value and relationship to other facts and events 
for the purposes of the contract can be stated. 
Above all, full documentation of due diligence undertaken for a 
transaction will be the basis for both the creation of the contract and an audit 
of its performance. As a consequence it builds up a body of knowledge which 
constitutes an image of the value of the product. This also forms the substance 
of the negotiation of the terms and conditions and ultimately the final price of 
the transaction to be agreed and seled by both parties. 
The subject of negotiations involves discussion of techniques including social 
psychology, games theory and personality. It has been said that almost every 
interaction between people has some elements of a negotiation, this may 
be something of an exaggeration but when people are involved in a formal 
negotiation they quite oen overlook their existing everyday negotiating skills 
or the lack of them. When undertaking a negotiation on behalf of a company 
it is the responsibility of the individuals to ensure that their practices are of 
the best standard. This involves some understanding of negotiation theory but 
more importantly negotiation practice. For many people in the pharmaceutical 
industry because negotiations are largely performed in English they may 
also be negotiating in a second language. This can lead to perfectly honest 
misunderstandings through inappropriate use or comprehension of the 
language which requires continuous and thorough review of all agreements 
and undertakings made during a negotiation by a qualified person with an 
excellent command of the language in use. As is so frequently the case in 
business development this requires accurate recording of the information 
exchanged in order that, as much as possible, miscommunications are resolved 
or avoided at the earliest possible stage. It can be very costly to have to return 
to a negotiated point later in a transaction because of a misunderstanding as 
all subsequent points may rest on this one and then require redraing of the 
agreement. Hence a clear negotiating plan is of great assistance at each stage 
of the negotiation to ensure that all points are covered during each discussion 
and the resolution of points which were not be addressed in the last session is 
not forgoen. In this situation mind mapping is a very useful tool as it permits 
a wide variety of points to be collected from the team and collates them into a 
document (see Figure 7.1). Each team member can use this document to keep 
track of proceedings and then make their own contributions.

The negotiation plan can refer once more to the basic building blocks of 
transaction building – Objectives, Strategy and Tactics. In each negotiation, 
whether it is the whole deal or a stepping-stone meeting on the way, a clear 
objective should be set. This might be to achieve clarity on a particular point, 
to establish the principal rights and duties of the parties or, a value range for 
the transaction. If the objective is clear to the team before going in then the 
strategy and roles used to achieve it can be planned. I was once invited to join a 
negotiating team by the general manager of a company. He wanted to persuade 
his medical director to make the commitment to back a specific project rather 
than pursue a broader plan which the medical director felt was less risky but the 
general manager felt lacked commitment and would cost more as well as take 
too long. He asked me to aend the meeting with him and yet to say nothing 
until he addressed me, at which point I should choose an appropriate phrase 
to agree with what he’d asked. As the discussion unfolded he manoeuvred 
the medical director to the point of the decision. The general manager then 
turned to me and said, ‘From the marketing perspective will we succeed if we 
do this?’ to which I replied, ‘Of course!’ The extra pressure of the ‘independent’ 
witness persuaded the, still somewhat doubful, medical director to make the 
commitment – the plan had worked perfectly! 
Figure 7.1 Negotiation mind map

One fundamental point to be considered though is the nature of the 
negotiation. In political and particularly military circumstances a negotiation 
is the peaceful alternative to conflict. As a result negotiations are very oen 
portrayed as having a win or lose outcome. As has been pointed out by many 
courses and books on the subject, in commercial circumstances the objective 
should more properly be win–win, if the purpose is to strike a bargain 
which is acceptable to both sides. If not – why enter the negotiation? There 
are, however, from experience rather too many people in the industry who 
measure their success by how much of a penalty their counterparty has to 
accept before the deal can be done. I have observed a tendency to abuse a 
powerful position particularly among people representing bigger companies. 
Although I’m not suggesting that ‘big pharma’ should act with humility I hold 
the view that a more powerful party to a negotiation has the responsibility to 
act with suitable respect for their counterparty. Unfortunately in many cases 
the aitude of representatives of smaller companies tends to reinforce the 
By way of example: in business development courses, I have run simulated 
negotiation, on several occasions where two teams are invited to strike 
a deal by acting as the negotiators for two companies based on the profiles 
of a development-level company with an interesting new product and an 
established company with a marketed product. Each time the simulation has 
been run, despite each of the teams of ‘players’ coming from a mixture of both 
small and large companies, the characterization given to the marketed product 
company is aggressive and exploitative while the development-level company 
is portrayed by the role players as the supplicant and in a weak position. 
Even when the teams are briefed to play the contrary roles the ‘dominance’ 
and ‘weakness’ creeps back into the exchanges until each has taken up an 
antagonistic position where the bigger company sets out to abuse the smaller 
by taking advantage of their strength. 
This observation from a teaching situation is borne out in real negotiations 
where I advise clients who are approaching big companies with a product 
opportunity. My own time in big pharma companies provided many examples 
of individuals, within my own company and in other large firms who 
knowingly or not ‘took on the mantle’ of the size of their company to act out a 
dominating role, but ended up feeding their ego rather than serving the needs 
of the company. In seing out the negotiation plan therefore it is necessary 
to take a view of the respective sizes of the companies and their motivation 
for entering discussions. If a company is seeking to auction an asset of high 
value which is sought aer by many large companies a very different aitude 

is required in the negotiation to that required if the company is seeking its 
first and validating partnership for a new technology – a situation where all 
the power lies on one side of the table. The real purpose of the negotiation is 
to reach an agreement and the main point of difference is likely to be on the 
valuation. As seen above, because this is subjective there will oen be a gap 
between the expectations between the two sides. 
One phrase that is frequently used to try and obtain the right balance 
between the parties is ‘in good faith’ or in Latin bona fides. This implies that 
there aside from its strict legal interpretation there will be an aempt made to 
reach an equitable solution by both sides. Good faith is the embodiment of the 
essence of a contract requiring both parties to work together, hence to negotiate 
in good faith implies that this is the desired outcome. 
The negotiation plan therefore needs to set out the objective for the company 
and to recognize the opportunities and constraints that both your own side and 
the counterparty have to work with to seek the best way forward. 
What then might be the elements of such a plan? In the case of a licensing 
deal it might be to secure the worldwide development and marketing rights 
to a product from an originating company. That’s fine but is insufficient as 
a description of the transaction outcome that your company might desire. 
Certain other criteria will also need to be met to satisfy the objective according 
to the situation. Will the rights be exclusive? What about manufacturing 
rights? Co-promotion rights? Continued development of the compound for 
other indications? All such criteria need to be laid out and agreed internally 
before engaging with the negotiating partner. This may be conducted as a 
debate amongst peers or decided unilaterally by senior management, aer 
consultation with internal constituencies in the company and once their relative 
levels of importance have been gauged. These criteria are supplementary to the 
product profile achieved earlier as they affect the way that the product can be 
brought into the market through the use of internal resources and so affect 
the ability to convert the potential of the product into value. But they are also 
vital components in the negotiation process as they may be traded one against 
another to mould the agreement into a workable contract between the parties. 
Thus the negotiation plan also becomes an inventory of bargaining chips, 
absolute requirements, desirable additions and issues to be avoided. 
As a result this inventory will provide the basis for an assessment of the 
right personnel to understand, articulate and communicate the company’s 
needs to the counterparty. This team should also be matched to the team they 

are going to meet on the other side of the table. The strategy of taking the correct 
resources into a negotiation is paralleled by military planning techniques 
which select the right number of people for a task who are properly briefed 
and given the right equipment; consequently, they are more likely to achieve 
their objective by following the agreed strategy and choice of tactics. In a 
negotiation choosing the right people with the right skills is part of the leader’s 
responsibility. Choosing the team will therefore be a major consideration in the 
overall negotiation process. 
The team at minimum should consist of at least two people who are present on 
every occasion when there is an interaction between the parties. While there is 
no absolute maximum, more than five people in a negotiating team can prove 
difficult to manage as the company’s position must remain consistent and should 
only be communicated with one voice. This is harder with so many people. In 
other words no maer what is discussed during a negotiation one person only 
should be authorized to make a definite statement to the counterparty which 
will become the statement from the company. This reinforces the need for the 
team to have a leader and only one leader. 
The leader must have the authority of the CEO and/or the board to speak 
on behalf of the company and must manage the team and the negotiation on 
their behalf. For the smaller company this person may indeed be the CEO who 
has that authority. In a larger organization the negotiation ought to be led by 
a figure senior enough to carry that delegated authority. There are two main 
reasons for this, the first clearly being the need for experienced management 
of the process and the second is to avoid having to seek approval for every 
small step or change in direction that may occur during the negotiation 
The remit given to the negotiating team must have clear objectives but 
sufficient latitude to be flexible in achieving the overall goal. This reminds me 
of an incident when we were pressed for beer selement terms on the eve 
of a major transaction by a third-party licensee from whom we required an 
assignment of rights to proceed with the larger transaction. I had been given the 
authority to negotiate terms up to a fixed ceiling of $7 million; the alternative, 
as the CEO starkly put it, being: ‘Otherwise we’ll sue them into the Dark Ages!’ 
Although the negotiation took some time we got the assignment by offering a 
variety of payments and compensation options which avoided litigation and 
stayed in budget without further recourse to the CEO and his legal team.

Depending on the deal therefore there may be a need for a technical 
expert, a medical expert, legal representation but always, whenever 
negotiating, one person should be inactive in the discussion and have the 
role of recorder sometimes referred to as the ‘scribe’. I was lucky enough 
to have a team member while at Roche who was qualified as an ethnologist 
(ethnology is a field closely associated with anthropology) and her abilities 
to study and record the interactions between people in a negotiation gave 
us a huge insight into not only what was being said but the importance that 
was assigned to it – on both sides of the table. So oen she would point out 
in the debriefing aer a negotiation session to one person or another that 
‘When you said “that” to the CEO on the other team he didn’t react well 
to it, and he will reject that point later,’ and sure enough despite having 
had agreement in the session we’d find that the issue she’d identified had 
indeed be rejected or modified in their response. Communication is much 
more complex than the mere verbal exchanges of a negotiation and since 
those days I have paid close aention to the reactions of other parties in a 
negotiation and to controlling the messages I send out both verbally and 
visually to good effect. 
Documentation of the discussion in a negotiation ideally should not be 
restricted to the points which were agreed but should also track the decision 
process including the misunderstandings and corrections that led up to the 
agreement. The value of the scribe becomes even more apparent, in that, without 
a speaking part in the session, the scribe can concentrate on both the content of 
the discussion and how the discussion has developed. This almost always gives 
a different perspective to the recollection of the debate on one or other issue. 
There is an adage, ‘when your mouth is open, your ears are closed,’ which 
acknowledges that if you are talking, it is very difficult to listen to another 
person especially in a negotiation. Because a negotiation is not a conversation, 
every word counts. It is an exchange of statements where each party is trying to 
establish their point of view independently of the other. Each will therefore be 
looking for every chance to restate or re-affirm their point which detracts from 
their ability to hear the other perspective clearly. 
Preparation is therefore essential when approaching a negotiation, yet quite 
oen some aspects are overlooked in the build-up and many of these factors are 
‘so’ in nature such as the location of the discussions. Frequently negotiations 
are held at the headquarters of one group or the other and from a logistics point 
of view this may seem sensible, yet it opens the door to a number of undesirable 
events. Many negotiations I have aended at small companies were plagued 

by interruptions as throughout the day the CEO or another person from 
the company had to break off discussions to deal with some business issue 
or another with the result that following the break a recap of the issues was 
required to return to the point at issue with a loss of continuity. Similarly the 
small company visiting the large partner may be the subject of interruptions 
giving the impression that they are not the focus of real aention and affect 
their motivation. Where it is possible the use of a neutral venue can avoid these 
problems and provide an environment where neither side is inconvenienced or 
advantaged by the other. 
Another simple point is that presentations should be made and given 
that are adapted to the audience rather than being a standard ‘pitch’. Too 
oen the complaint is heard from one side or the other that they sat through 
a 30- or 40-minute dissertation of irrelevant material, or worse, hopped from 
one presentation to another because the information relevant to that meeting 
had not been collated into a coherent presentation. A practical advantage is 
provision of hard copies of the material as well as in electronic format – on the 
day – on CD, memory stick or similar device. This has increasingly become the 
standard of professional courtesy and if information is not provided this way 
it is seen as a negative point. 
Yet with mention of the provision of materials we should revisit the issue of 
confidential disclosure agreements (CDAs) discussed in Chapter 5. Here when, 
at last, truly substantial issues are to be discussed, confidentiality must be 
assured and suitable undertakings should be exchanged if this has not already 
been completed. The proposal of terms and conditions for a commercial 
agreement are not trivial hence it is necessary here to step through the normal 
requirements of the term sheet and identify when and how these should be 
presented and discussed. 
The purpose of a term sheet is to capture the essence of the proposed 
transaction in writing and to form the framework of the negotiation. The 
terms are stated in contract law and terms are those statements which are 
guaranteed to be true in the document. A condition is a specific form of term 
where the condition (such as a patent being issued) must be satisfied before 
the term becomes binding. Other conditions, such as a representation, may be 
stated by one of the parties but is not or cannot be guaranteed. There are also 
statements known as ‘puffs’ in contract law which are recognized as sales talk 
and are not regarded as being trustworthy, nor would the person uering a 
puff be held to deliver on its promise in the way that an agreed term would 
be by a court of law. Hence in an offer of contract there may be puffs and 

representations but it would not usually be possible to use these as grounds 
for suing for breach of the contract if they were unfulfilled as they would not 
be recognized as terms in the contract. So in creating a term sheet, statements 
of those types are avoided and accurate descriptions and definitions used 
instead. In effect the term sheet lays out the elements of a transaction in a 
logical sequence and in a way that the parties can understand and agree on. 
In the context of a pharmaceutical product licence the term sheet will fulfil at 
least the following tasks: 
identify the contracting parties 
state the purpose of the contract 
identify the assets 
state the price to be paid and how 
state the duration of the contract 
state any contingencies or constraints. 
Capture of structural value 
Framework for negotiations 
Repetition introduces errors 
Final version should be approved by de novo reader 
Conditional elements can allow for absence of known facts 
Version control 
Master reader 
What if? 
Figure 7.2 Term sheet issues

The first term sheet is typically proposed by one of the parties as their 
preferred outcome to which the other side responds by either accepting or 
rejecting the proposal in whole or in part. So Company A might request of 
Company B: 
‘An exclusive, worldwide licence to Product X in perpetuity with the 
right to manufacture and develop the product further for a payment 
of $10 million and a following royalty of 5 per cent of net sales for 
10 years.’ 
This could lead Company B to respond that they would agree to an exclusive 
world licence to Product X but would retain manufacturing and development 
rights and want a payment of $25 million and a 15 per cent royalty for 20 years 
on gross sales. 
These two positions are obviously far apart but has established that under 
acceptable conditions Company B is willing to license Product X to Company A 
on an exclusive worldwide basis if these can be negotiated. The process which 
follows may be rapid or can be long drawn out; counter-proposals may be 
exchanged frequently in an aempt to close the deal quickly or at long intervals 
as the internal valuations of the product’s worth and the perception of the offer 
value fluctuate, or until other pressures alter the motivation of one or other of 
the companies. 
During this process it is absolutely vital that there is a strong control of the 
printed versions of the term sheet which is being circulated and negotiated. 
It is time consuming, annoying and may even be the cause of failure in the 
negotiation if the negotiators and their colleagues are not all using the same 
version of the term sheet when considering and evaluating the terms. On each 
page of every iteration of the term sheet the date and serial number (such as V.1, 
22 May 2008 and then V.2, 30 June 2008) should be in the header or footer of the 
document. At each negotiating session all the negotiators can then check that 
they are using the latest version for the next round. It is also useful to have the 
previous versions available for reference during these sessions as sometimes 
going back to a previous wording can recover a stalemate in the discussions 
and allow the deal to progress. 
To ensure that each new version captures the points which have been 
agreed in the last negotiation session all participants should receive a markedup 
copy of the last term sheet showing the changes that have been made and a 
dra of the fully revised version. These are frequently referred to as the ‘blackline’ 
and ‘clean’ copies respectively. Feedback on the clean copy from anyone 

requiring a change or inclusion of a missed point can then be incorporated 
for a final new version. Most word processing packages have a black line 
change-tracking facility which can produce these two versions easily. When 
using these packages, however, it is even more important to ensure that each 
changed document is saved with a new and distinctive file name for example, 
Productxdeal250707 V.2 including the deal name, version number and date. If 
more than one is produced in a day a suffix can be appended such as V2.3 which 
keeps a full record of the change history should things become confused. 
Some of the terms in a term sheet may not, however, actually be known 
at the time the document is drawn up, particularly with compounds in 
development which in time might even be found not to work. These terms 
may therefore be conditional and describe the consequences for the contract for 
each of the cases envisioned as the possible outcomes. So although the terms 
of the contract will be binding, they do not have to be factually complete at the 
signing of the contract. 
Being unprepared is the worst thing to be in a negotiation. If you do not know 
what you want you cannot get it and will end up with what you get. If the other 
side has an objective and a plan you will end up in their back pocket. So, here 
are some practices that can help to set the scene for a negotiation. 
The first is a technique known as ‘anchoring’. This has been deeply studied 
by Daniel Kahneman, Nobel prizewinner for economics in 2002 and his work 
is far more extensive than what is discussed here. He presents an example of 
anchoring by asking an (US) audience to think of the last four digits of their 
social security number, and then to estimate the number of physicians in New 
York. The correlation between the magnitude of the social security number and 
the size of their estimate is around 40 per cent, a long way beyond a chance 
result. Simply thinking of the first number, large or small, biases the estimate 
of the second, even though there is no connection between them. In the same 
way it is possible for one negotiating team to influence the other by continually 
referring to another unrelated number, either higher or lower depending on 
the objectives. As this works in both directions you are able to set the tone of 
a negotiation merely by directing the ‘ambient’ frame of reference when you 
come to the negotiation of value, which you may wish to be high. Alternatively 
if you are seing the purchase price of supplies you are buying, a previous 
discussion of items in small numbers will be more appropriate. Subtle factors 
such as this have a great influence on the interaction between negotiators and so 
there is a need for constant vigilance to ensure that the signals you put out are 

under your control and that the ones you receive are recognized and allowed 
for in your interpretation. Here again the value of the scribe is evident: while as 
the negotiator you will be trying to remain detached from the emotional side 
of the interaction with your counterpart, it is rarely possible to remain quite 
so aloof, we are all human aer all. Yet if through vigilance and subsequent 
analysis you can recognize the techniques being applied you can intellectually 
take them into account before making responses. 
Erving Goffman, in his book The Presentation of Self in Everyday Life, has a 
lot to say about the control of responses individually and in teams. He uses 
the term ‘performance team’ to describe how groups of people establish roles 
in order to present a desired image or impression on others either individuals 
or teams. He gives the example of a medical team doing a ward round where 
the junior is required to read out the notes to the rest of the team in front of 
the patient, which demonstrates through his relative ignorance the learning of 
the professor and impresses the patient. In the same way the negotiating team 
needs to understand explicitly their individual roles in the negotiation team 
and present the correct image to elicit the right responses. 
Once more the construction of the team is of great significance in this regard. 
The role of the scribe who stays quiet and takes no part in the active discussion, 
and the role of the leader who speaks with the authority of the company, have 
already been identified as major contributors to success. The team performance 
can be enhanced though by other members deliberately adopting roles which 
assist in this task. The occasion I mentioned earlier in this chapter, when I was 
invited to join a negotiation to perform one task which was to agree with the 
general manager, demonstrates this. So it is that in a series of negotiations it 
can be very useful to have one member who is continually asking ingenue 
questions, as if they don’t understand, to force the other team into revisiting 
some point which does not suit your side and which you wish to pursue while 
the other team is trying to move on and avoid further discussion. In asking for 
a repetition quite oen a different form of words may be used and this opens 
up the possibility of reinterpreting the point to your own advantage. 
Having someone else to play this role therefore permits the leader to sit back 
and make the decision about when to say yes or no to a point, without having to 
demean his role by asking the naive questions. Others may, intrinsically or by 
design, take up a challenging or belligerent aitude to disrupt the performance 
of the other team. Whichever way the performance is orchestrated and the 
roles apportioned, until the team has had a good deal of experience working 
together there will be a need to rehearse the negotiation performance just as a 

theatre group would rehearse before performing a play. Large companies have 
the advantage of staff dedicated to the task of negotiation and so these teams 
oen build up good internal working relationships and a repertoire of roles to 
assist them in their performances. The professionalism which they can bring 
to a negotiation can be daunting for a smaller company. As a result, nowadays 
I am oen called in to advise smaller companies on how to deal with a larger 
company team and assist their preparations and rehearsals, as their own limited 
resources must oen be called in from their own specialists at short notice to 
avoid halting day-to-day business for the needs of the negotiation. The smaller 
company is usually at a huge disadvantage without this kind of preparation: 
they will only enter a negotiation once in a while but the large company team 
will be following a regular paern. If the small company is poorly prepared 
they will have to deal with issues as they come up and improvise a response. 
Improvisation has a place, but is a higher-risk strategy than having a preplanned 
objective. It is much easier to be deflected if you are not working to a 
plan with individual stepping stones toward your goal. 
Building the team, briefing the team, assigning roles and rehearsing will 
make the negotiation in prospect more accessible, but as we are all aware the 
real world is less friendly than a rehearsal suite. Even if the whole performance 
of your team is a scripted game plan, it will be in danger if there are issues 
which have not been considered in puing the plan together. Having someone 
external to the project or the company offer a critique is a very useful discipline 
before commencing live negotiations. In cases where there is a great deal at 
stake companies can even engage in what are called ‘war room simulations’, 
a description drawn from the Cold War years in the United States when the 
nuclear response deterrent was frequently rehearsed in ‘dry run’ scenarios to 
practise responses to different aack scenarios. In a similar vein large companies, 
especially when considering major acquisitions, are known to construct two or 
more negotiation teams internally and have them perform mock negotiations 
from assumed starting points to see if there are flaws in their plans or where 
their tactics could lead them astray. 
Not all negotiations are critical to the future of a company, yet negotiating 
skills are at the heart of every success and either a tough hard-nosed approach 
or a kid-glove seduction can achieve the business objective if they are deployed 
with premeditation and conviction. 
What happens though if your negotiating stance is unaractive or ineffective? 
Or if you are placed in a competitive bidding situation? How do you regain 
traction on a deal which is geing away from you? How do you maintain 

momentum when the counterparty will not engage in a timely fashion? How do 
you negotiate from a position of weakness? All these questions are a maer of 
regular review throughout the negotiation process (see Figures 7.3 and 7.4). 
In the negotiating room when things are not going to plan or initial 
expectation, one of the best responses is the ‘time-out’ or caucus. This gives 
the team a chance to get away from the table and compare notes. There is a 
risk in doing this that if things are going your way you will lose momentum, 
but if they are not it can be your chance to call a temporary halt and regroup. 
When the session recommences a quick recapitulation of the points leading up 
to the break and restating your case can give a negotiation a new start without 
loss of control. To facilitate this issue a secure and separate location should be 
provided for both of the teams as a part of the choice of venue, with Internet, 
fax and telephone communications facilities, as well as printers if possible for 
on-the-spot modifications, additions or changes of plan. 
Figure 7.3 Do’s in negotiations 
Meet in neutral areas 
Construct your team from the best 
(not those available or ‘tourists’) 
Run the show, be the boss 
(not a chairman) 
Document everything 
Communicate, 360 degrees 
Figure 7.4 Don’ts in negotiations 
Allow side conversations, verbal or email 
Be inflexible, just stubborn 
Get dragged into side-issues 
Stay focused on your plan 
Forget to listen 
Repeat what they say

Running a negotiation requires continual vigilance not just on the detail but 
on the wider scene. Good negotiators are usually those who keep an eye out for 
the unusual and are prepared to test the counterparty for not only weaknesses 
but for further opportunities. One of my favourite questions learned from my 
boss while in investing is ‘What else?’ At the end of most calls or meetings 
he would throw out this non-specific yet challenging question just to see if it 
produced a response. To him every conversation is like a negotiation and, until 
the answer to ‘What else?’ is ‘Nothing’, the deal isn’t done.

Sealing the Deal: 
The Contract 
Following the selection of a product and the proposals made to the owning 
company and having negotiated the terms to achieve a satisfactory deal for the 
components, these must now be captured in a contract which will allow the 
parties to achieve their objectives. In order to achieve this a document must be 
drawn up which is comprehensive and comprehensible to both parties. This is 
not easily achieved and so requires a great deal of skill. This is quite properly 
the province of a corporate contract lawyer; however, business development 
practitioners need to have sufficient awareness of the issues involved in contract 
law to be able to manage their negotiations to a point where the agreements 
they have made can be draed accurately and then can be enacted in law. It is 
worth adding a disclaimer at this point that as a non-lawyer my views are open 
to wide interpretation; however, the following will I hope act as a loose guide 
for those of us who have not studied law formally. 
Before plunging into the details of a contract it is worth understanding 
what the contract is and the following definition states the active principles in 
suitable legal language: 
An agreement free from vitiating factors such as mistake or 
misrepresentation and constituted by the unconditional acceptance 
of an outstanding offer involving a reasonably precise set of terms 
between two or more contractually competent parties who intend to 
create mutual and reciprocal rights and duties that may be the subject 
of judicial sanction if they are expressed in any required form, are free 
from the taint of illegality or immorality and are not subsequently 
discharged by law, by agreement, by breach or by sufficient supervening 
(The Canadian Encyclopedic Digest, 3rd edition) 
Which I interpret as ‘two parties agree to something reasonable which does 
not adversely affect other people’.

Contract structure 
When an agreement is negotiated the terms and conditions may be complex 
and as a result sometimes even become inadvertently unenforceable or actually 
illegal. Adjustments to the agreements made in negotiation in normal English 
must therefore be made to permit a contract to be wrien. The method for 
achieving this as noted before requires a highly formalized structure. The 
analogy of a computer program can help to illustrate this point. A program 
wrien in a computer language such as Basic commences with a name for the 
program or routine and a description of its purpose. Following this are a series 
of declarations which identify the elements within the program, describing their 
name and type. These declared elements may then be included in programmatic 
statements contained in what is known as a subroutine using operators like +, -, 
*, /, and, or; each of which follow a structured grammatical language to provide 
a clear relationship between the elements which when computed produce a 
result. So it might run along the lines of what is presented in Figure 8.1. 
There is a fixed relationship between these declared elements that is allowed 
to vary within certain defined parameters and can be used for reference to 
Figure 8.1 A licensing ‘program’ 
Name ‘Contract Program’ 
Rem ‘Description: A series of statements to demonstrate the operation of a 
Rem ‘Declarations’ 
Sales = Variable, Numeric 
Term = Variable, Numeric 
Payment = Constant, Numeric 
Royalty = Variable, Numeric 
Product = Constant, String 
Licensor = Constant, String 
Licensee = Constant, String 
Licensee makes Payment to Licensor 
for Product 
if sales > 0 
Royalty = 15% 
end sub 

determine the result where ever required. Just as in a computer program where 
one subroutine can call another subroutine, the clauses within a contract which 
perform a task can call other clauses containing more terms into play. Indeed 
the analogy holds to the point where one contract can call on a different contract 
with its own special conditions to form an overall description of the operating 
relationship between two companies in for example a licence. 
To get to this point the purpose of the contract (or contracts) must be 
declared. This will have been agreed in the term sheet discussions where the 
terms and conditions to be entered in the contract have been defined. This 
might be as simple as in this example reproduced in part here which is drawn 
from a real contract but modified to hide the actual companies and products. 
This tells us what the agreement is, who the parties are and, where they can 
be found as legal entities. We can then go on to look at the purpose, or as they’re 
called in contract law, ‘recitals’, which is where the complexity of the contract 
starts in earnest. This is taken from the same contract: 
This LICENSE AGREEMENT (‘Agreement’), effective as of May 17th, 1986, by and between 
SPROAT & COMPANY, an Arkansas corporation with its principal office located at Sproat 
Corporate Center, Rapid City, Arkansas 12345 (‘Sproat’), and Origin8or, INC., a Delaware 
corporation with its principal offices located at 25 Ayrtech Court, Liberia, California 94123 
and Origin8or’s Affiliates (together ‘Origin8or’). 
WHEREAS, Sproat is engaged, among other things, in the business of discovering, 
developing, manufacturing and marketing pharmaceutical products for the treatment 
and prevention of infectious diseases; 
WHEREAS, Sproat’s research for antimicrobial agents has resulted in Sproat owning 
patents, patent applications and know-how relating to an mycocyllin B analog known 
as SP202255 (and analogs thereof); 
WHEREAS, Sproat has been developing intravenous and oral formulations of SP202255 
and generated regulatory filings, pre-clinical and clinical data and other information 
related to SP202255; 
WHEREAS, Sproat is interested in exclusively licensing SP202255 to a pharmaceutical 
company capable and desirous of developing and commercializing both parenteral and 
oral pharmaceutical products of SP202255 (and/or analogs, salts or pro-drugs thereof); 

We cannot yet move onto the actual contract until the declarations or 
definitions have been made as they will be applied in the contract and this 
is achieved by clearly stating them, sometimes with negative examples to 
show what is NOT meant. These terms are set out in alphabetical order so that 
they can be referred back to by anyone reading the contract to ensure that the 
statement of terms is internally consistent. 
The following definitions show several constructions demonstrating some 
of the difficulties encountered in defining an item accurately, completely and 
distinctly from other interpretations. 
WHEREAS, Origin8or is a specialty pharmaceutical company which concentrates in the 
development and commercialization of compounds in the area of infectious diseases; 
WHEREAS, Origin8or has the capability and expertise to develop and commercialize 
both parenteral and oral pharmaceutical products; 
WHEREAS, Origin8or is interested in exclusively licensing rights to SP202255 from Sproat 
for the worldwide development and commercialization of both the parenteral and oral 
products of SP202255 (and/or analogs, salts or prodrugs thereof); and 
WHEREAS, subject to the terms and conditions set forth in this Agreement, Sproat is 
willing to exclusively license to Origin8or and Origin8or desires to exclusively license 
from Sproat rights related to SP202255 so that Origin8or may be enabled to proceed 
with the further development and commercialization of SP202255; 
NOW, THEREFORE, the Parties hereto, intending to be legally bound, hereby agree as follows: 
1.1 DEFINITIONS. For purposes of this Agreement, the following terms shall have the 
meanings set forth below: 
‘AFFILIATES’ shall mean, with respect to a Party to this Agreement, any Persons directly or 
indirectly controlling, controlled by, or under common control with, such other Person. 
For purposes hereof, the term ‘controlled’ (including the terms ‘controlled by’ and ‘under 
common control with’), as used with respect to any Person, shall mean the direct or 
indirect ability or power to direct or cause the direction of management policies of such 
Person or otherwise direct the affairs of such Person, whether through ownership of equity 
participation, voting securities, beneficial interest, by contract or otherwise. Affiliate shall 
specifically exclude third parties to which Origin8or has granted a sublicense pursuant to 
authority granted by this Agreement where Origin8or has no relationship to the sublicensee 
other than a licensor–licensee relationship.

‘APPLICATION FOR MARKETING AUTHORIZATION’ shall mean (a) in the United States a new 
drug application filed with the FDA pursuant to 21 U.S.C. Section 357 and 21 C.F.R. Section 
314 (‘NDA’) with respect to the Product and (b) in any country other than the United 
States, an equivalent application or set of applications for marketing approval comparable to 
an NDA necessary to make and sell Product commercially in such country. 
‘CO-PROMOTE’ or ‘CO-PROMOTION’ shall mean an arrangement, in one or more 
jurisdictions where permitted, in which (i) there is a single registration holder for the 
Product; (ii) a single Party responsible for the manufacture of Product; (iii) a single Party 
establishing the price of Product; (iv) a single Party booking sales; (v) a single trademark 
being used in connection with the Product; (vi) both Parties promote and market sales of 
the Product in such jurisdiction(s); and (vii) either or both names or logos of the Parties 
appear on the Product. 
‘DAMAGES’ shall mean any and all costs, losses, claims, liabilities, fines, penalties, damages 
and expenses, court costs, and reasonable fees and disbursements of counsel, consultants 
and expert witnesses incurred by a Party hereto (including any interest payments which may 
be imposed in connection therewith). 
‘DATA EXCLUSIVITY PERIOD’ shall mean the period, if any, during which the FDA, or 
other equivalent regulatory agency in the case of countries other than the United States, 
prohibits reference, for purposes of seeking Regulatory Approval, to clinical and other data 
contained in the Regulatory Approval package of Origin8or or its sublicensee which is not 
published or publicly available outside of the Regulatory Approval package and relates to 
the Product, without the consent of the Party holding the NDA or equivalent Regulatory 
‘EFFECTIVE DATE’ shall be the date set forth in the first paragraph of this Agreement. 
‘EUROPE’ shall mean the European Union, including the following countries: Austria, 
Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, 
Netherlands, Portugal, Spain, Sweden, United Kingdom and any other European Union 
countries at the time of the Effective Date. 
‘FDA’ shall mean the United States Food and Drug Administration, or any successor thereto. 
‘FTE’ shall mean the equivalent of the scientific work on or directly related to the Product 
of one scientific person full time for one year (consisting of a total of forty-seven (47) weeks 
or one thousand eight hundred eighty (1,880) hours per year) (excluding vacations and 
‘GAAP’ shall mean generally accepted accounting principles in the United States, 
consistently applied.

These definitions in the example continue though the list of terms required 
to capture all the elements that will be needed to describe the contract. 
‘REIMBURSABLE DEVELOPMENT EXPENSES’ shall mean all internal and external direct, 
actual and documented costs incurred by Origin8or after the Effective Date to develop the 
Oral Formulation of the Product, including, without limitation, pre-clinical and clinical trial 
expenses (including, without limitation, the direct cost of clinical trial materials), reasonable 
Third Party costs, Regulatory Approval expenses and fees, and costs associated with scientific 
personnel dedicated to development of the Oral Formulation of the Product, where scientific 
personnel costs shall be calculated at a rate of Two Hundred Thousand Dollars ($200,000) 
per FTE. The purchase of raw materials or supplies or external Third Party services shall be 
calculated using actual direct costs incurred by the Parties for such Third Party goods or 
‘RESERVE INVENTORY’ shall mean Product Inventory which is not being purchased by 
Origin8or as of the Effective Date and which is specifically identified as Reserve Inventory in 
EXHIBIT D attached hereto. 
‘ROW’ shall mean all the countries and territories of the world, except those in North 
America and Europe. 
‘ROYALTY TERM’ shall mean, with respect to each country in which Product is sold the 
period of time equal to the longer of (i) ten (10) years from the date of first sale of the 
Product in such country, (ii) the expiration of the last-to-expire Licensed Patent listed in 
EXHIBIT A in such country that claims such Product, or (iii) the period of time equal to the 
Data Exclusivity Period in such country. 
‘START-UP INVENTORY’ shall mean Product Inventory which is being purchased by 
Origin8or as of the Effective Date of this Agreement and which is specifically identified as 
Start-Up Inventory in EXHIBIT D attached hereto. 
‘TERRITORY’ shall mean all the countries and territories of the world. 
‘TRANSFERRED ASSETS’ shall mean the Start-Up Inventory and the Product Data Package. 
‘ORIGIN8OR CO-PROMOTION RIGHT’ shall have the meaning set forth in Section 3.4(f). 
‘ORIGIN8OR IMPROVEMENTS’ shall mean any inventions, patentable or not, information 
and/or data that are generated, identified and/or discovered by Origin8or during the term 
of the Agreement, based on use or practice of the Licensed Patents or Licensed Technology, 
and are related to the Product, including, without limitation, pre-clinical studies and 
clinical trial information, manufacturing processes, formulations, modes of delivery and/or 
data necessary for the manufacture, use or sale of the Product, or peripheral and/or SAR 
compounds, pharmaceutical compositions, manufacturing processes, product configurations 
and methods of use related to the Licensed Patents. 
‘ORIGIN8OR RESPONSIBILITIES’ shall have the meaning set forth in Section 3.1 hereof.

The material given in example has had its details changed to protect 
anonymity but has been taken from a real contract. The definitions used and 
their structure are entirely typical of licence contracts enacted in the United 
States and in most jurisdictions where common laws and contract laws are 
based on English Law. The degree of detail permits almost no misinterpretation, 
so when these definitions are used in the context of the contract their meaning 
can be referred to at any time by looking at the definitions section the contract. 
Contracts drawn up under other European country laws by contrast have 
historically oen not been so detailed. This had led to wider interpretations 
when disputes occur, especially where the parties to the contract are from 
different countries and legal jurisdictions and may not have understood the 
implications of the agreement they have made. The trend now is to follow a 
more Americanized model and oen to dra contracts in English even when 
they are enacted between companies neither of whom have English as their 
mother tongue. Litigation, or the threat if it, in the pharmaceutical industry 
sadly is increasingly being used as a negotiation ploy rather than a last resort 
and the protections that a solid and well-worded contract provides is the first 
line in establishing the rights and duties of the parties. 
Other contract types such as clinical study agreements, distribution 
agreements and supply agreements each have their own standard forms. 
The sample contract I have used to illustrate definitions continues for 
another 25 pages and includes sections titled as follows: 

Drafting the contract 
It is not the aim of this chapter to explain in detail every part of a contract but 
to describe the structure of the document in sufficient depth to indicate its use 
in the general run of business. What this example does illustrate very clearly is 
the absolute reliance of the business development function and the company 
as a whole on well-qualified and experienced legal advice. In contract law 
the meaning of each word or phrase has a particular and specific significance 
and when dealing with international transactions every contract needs to 
be checked for its validity and enforceability in each individual jurisdiction 
where the companies will be relying on it to protect their businesses. While this 
process should not be undertaken by non-professionals, as the probability of 
making costly mistakes is extremely high, the governance of the process needs 
to be managed by the business development function whether they are legally 
qualified or not. 
During the draing of such a contract there needs to be very close 
collaboration between the legal department and the business development 
group with close management of the inputs of each individual specialist into 
the components of the contract. Ensuring that the overall scope of the contract 
captures the negotiated points, however, must remain the responsibility of the 
business development department. Unless the contract reflects the agreements 
made and continues to do this through successive dras, the spirit of the 
agreement will be lost. Unfortunately, some legal departments have been 
known to try and seek to improve the conditions of a contract by careful use 
of draing language. It may even be that substantial changes are made by 
an overzealous legal department in an effort to please management. In fact 
recently one of my own advisory contracts was returned by a legal department 
aer I had agreed terms with the CEO in which the redra of my proposed 
contract doubled the period of my engagement, halved the fee and introduced 
a performance component of no relevance to the task all with no reference to 
either myself or the CEO! While this example was blatant on numerous occasions 
legal redraing of a more subtle nature either in the definitions or deep in the 
clause structure has deliberately been used to distort the agreed business terms 
beyond recognition. Oversight is required to preserve and maintain not only 
the facts but the truth of the negotiation. 
Prior to the draing of such a contract the parties will have agreed the 
substance of the term sheet and may choose to execute a leer of intent which 
will bind the parties to the execution of a contract during the period while 
the contract is being draed. As may be seen from the complexity of the 

example shown in this chapter, this process can take many weeks if not months 
to complete. In the interim the Leer of Intent (LOI) can secure the interests 
of both parties and permit the transaction to be brought to an orderly close 
without undue haste. However, there are occasions when there is a need to close 
a deal more rapidly. For instance this might be to meet the end of a financial 
year, or to beat out a competitor, or to benefit from taxation regulations. In 
these cases there are several things which deserve particular aention in order 
not to be overlooked. The most critical of these is to ensure that a schedule 
of required documentation is laid out before the closing approaches and that 
therefore all contracts, subsidiary agreements, permissions, liens, assignments 
and waivers are executed. This needs to be recorded by the legal department 
and the completed schedule overseen by business development to ensure that 
all rights and titles are transferred on or by the closing date. 
Of particular importance in perfecting a product licensing deal are the 
re-registrations of marketing authorizations, clinical trial certificates and the 
like. Moreover, the wave of regulatory fallout from a transaction needs to be 
pursued across the globe to ensure there is no possibility of a territory being 
le out and generic competition being commenced through an oversight. This 
kind of problem was highlighted for some companies aer Malta acceeded to 
the European Union: they had not considered the possibility 20 years before 
that such a small state would become an independent member of the EU and 
had therefore had not registered their products there. This has permied 
a burgeoning generic industry to spring up with the right to distribute its 
products throughout the EU. The number of states in the EU was 27 in 2007 
and is likely to continue to increase as accession states qualify for membership. 
It is to be hoped that legal departments will also have taken note of the recent 
independence of Montenegro and of other small Balkan states and will not 
have made a similar error regarding product and patent registrations. 
Closing can be impeded unless aention to detail is paid to issues such as 
inventory management, noted before; whether the inventory is cGMP (clinical 
Good Manufacturing Practice) materials for clinical trials, batches of finally 
manufactured product, components or packaging materials. All inventory 
covered by an agreement should be accounted for by physical checking not just 
a paper check. Any of these items can become ‘lost’ temporarily or permanently 
during a change of ownership unless the receiving party is completely vigilant 
in ensuring that the transfer is effected and this will require warehouse visits to 
verify the existence of the physical stock, the amount, that the materials are in 
date and not subject to spoilage.

If there are outstanding issues post-closing and an escrow account has been 
set up to remedy discrepancies or defaults, the contract or subcontract needs 
to be uerly explicit in its interpretation of when, what and how a default, a 
breach, or transgression is constituted, and how the trigger will be signalled to 
the counterparty and the remedy will be applied. Naturally this implies that 
as the transaction progresses the business development group will take an 
active part in ensuring that both parties comply with the terms of the contract. 
How long this should remain the responsibility of the business development 
department and when the project can be taken over by operational management 
will depend very much on the complexity of the transaction and the tenor of 
the closing. If all is seled on congenial terms there should be fewer concerns 
to be monitored. A toughly negotiated transaction with contentious issues or 
disaffected personnel on either side will require periodic or more frequent 

Making the 
Transaction Work 
The nature of the alliance 
The structure of an alliance results in large part from the differences or 
similarities of the partners in size, financial capacity and strength of portfolio. 
This leads to relationships which are either dominant/subordinate or peer to 
peer in nature. The symmetry of the partnership at the highest level will have 
a strong influence on how the alliance needs to be managed at a personal level. 
As has been noted elsewhere the culture of bigger companies tends to induce 
some managers to role play the self-important bully when dealing with their 
partners merely because of the size of the company they work for and this 
can have very negative effects on the outcome of the alliance if it is allowed to 
disturb its work. Strong leadership in an alliance needs to be tempered by a 
sense of duty to a smaller or less experienced partner to obtain the best results. 
Observing the interactions between the managers is a good way of diagnosing 
whether an alliance is working well or not. An alliance which is suffering 
tensions between the respective managers is unlikely to be as productive as 
one where good leadership skills are being practised. 
Motivations for forming an alliance are expressions of the strategy adopted 
by both companies. For an alliance to succeed the combination of the strategic 
intents of the partners has to make sense. These typically fall into one of three 
categories: defensive, offensive or discovery. 
A large company may need to shore up its development pipeline or 
reinforce its sales abilities in a specific territory. In these situations being able 
to avoid having to take the time required to recruit and train staff or to bring a 
product from research into the clinic has major aractions. Forming an alliance 
with a partner that has the needed resources is a defensive move which makes 
a great deal of sense. This may be true of the partner as well where a pooling of 
resources gives protection from competition or erosion of the number of patented 
products in the portfolio. Alternatively the partners may have an offensive or 
more aggressive ambition in mind having seen a market opportunity which 

together they can aack although alone neither would be likely to succeed. 
Whatever the motivation, such an alliance has to bring benefits to both partners 
to make commercial sense. A company motivated by discovery, however, will 
expand its existing capabilities and venture into new areas. Smaller and earlierstage 
companies have fewer constraints with regard to experimentation in 
novel therapies as their focus is to innovate, larger companies although they 
have less financial constraint need to produce a reliable source of income. So 
it is no surprise to see large companies taking advantage of their strength and 
partnering with successful pioneers in Biotech. 
Alliances are oen aimed at the three key areas of the business; research, 
development and commercial (see Figure 9.1). 
It is in these areas that the core competencies of an individual company can 
be augmented most easily and have a major impact on the success of a project 
or the company as a whole. A company would not typically enter an alliance 
to improve its administration functions. Under these three broad headings 
subsets of activity can be the focus of an alliance and these may be further 
allied in a network of partnerships all aimed at achieving one objective. This 
network may be organized as a consortium of companies with multilateral 
relationships each to the other or may be linked through one company in a 
‘hub and spoke’ arrangement where the overall project is coordinated by one, 
usually the largest, company (see Figure 9.2). 
In sales for instance several distributors may be appointed for different 
countries and centrally supplied with products. In development, companies 
may band together to share the tasks of process development, formulation and 
clinical research. Discovery research is clearly an area where cooperation and 
Joint venture 
Figure 9.1 Alliance types

collaboration with partners is a benefit, not just because of the savings in costs 
of time and money but for the combination of ideas from different sources to 
address a research target. Bilateral alliances also offer companies the chance to 
access key technologies which they do not or cannot own. 
Making the alliance work 
The conclusion of the contract was at one time the signal for business 
development to step out of the transaction and return to the market for 
more deals. This is no longer the case. The imperative now is to provide a 
partnering environment where small and large companies can benefit from 
the transaction and complete the development of the drug, or integrate the 
acquisition. Following the acquisition of Boehringer Mannheim by Roche 
in 1997 I was involved in the considerable programme of integration which 
followed the closing of the transaction. A year later the press was commenting 
on how smooth this had been by comparison with other large M&A deals at the 
time. What we had learned from that period was that planning is of the most 
importance in such an undertaking and this large part came from the, at that 
time, still recent corporate memory of the takeover of Syntex. 
Only a few companies have the benefit of frequent experience in M&A, 
which permits the creation of a set of guiding principles learned from each 
integration of a company and can be implemented from one transaction to the 
next. The consequence of this is that the executives undertaking the transaction 
are put in the position of being ‘first-timers’ and so lack the reflexes to make quick 
but correct decisions. Business development typically has to deal with new, 
Figure 9.2 Alliance structures 
• Bi-lateral 
• Multi-lateral 
• ‘Hub and spoke’

or at least unfamiliar, situations every day in evaluating novel opportunities. 
How then to translate the experience of one situation to another and maintain 
a consistent approach? 
New situations require a structured approach and useful parallels to an 
unstable business environment are provided by the problems encountered 
in flying a light aeroplane and in scuba-diving where unfamiliar events 
oen occur and require a trained, structured approach to handle them and 
sometimes survive them. Pilots and divers are trained to follow simple but 
effective guidelines which lead to courses of action which have been worked 
out by trial and error over years of handling problems to give the best result 
in an emergency. One of the most notable of these is a very useful acronym 
used to assist in a crisis: PAPA – or Pause, Assess, Plan, Act. The deliberate 
act of acquiring a company may not sound like a crisis but for two large 
organizations to be brought together without ‘crashing’ their cultures or 
operational effectiveness takes on the same kind of urgency. As in the air 
or under the sea, problems will crop up for the first time in the experience 
for the manager once a takeover has occurred. The problems may be in 
manufacturing standards, clinical data records, accounting procedures, some 
ongoing litigation or other special situations where the normal practices in 
the acquired company are alien to the new owner, who will need to rapidly 
assimilate, understand and decide on a course of action and literally ‘take 
over the reins’ of the new company and try not to fall off the horse. PAPA 
is an excellent aid to good planning in situations such as M&A and alliance 
creation and management where, despite good planning, the unexpected is 
almost sure to happen. 
Unless there is some immediate crisis requiring an instant decision there is 
almost no excuse for jumping into action before it is needed. Many of the leaders 
I have worked with had the characteristic of not being easily rushed into a 
decision. Early in my career at G.D. Searle UK, the marketing manager Brian 
Moyse would oen demonstrate sang froid in the face of a crisis and usually 
the problem would resolve itself before any action was needed. This was an 
excellent lesson for a young manager in the art of pausing. 
Gathering the facts is of paramount importance before any action. There are 
many proverbs and sayings – look before you leap, a stitch in time, and so 
on which have made this point. What looks like a problem may not be that 

at all when viewed coolly and with all the facts at hand. Oen an impending 
worry looks worse than it is in reality and may be a caused by a ‘mirage’ 
of misunderstanding, which reinforces the need for the pause and a clear 
determination of the facts. 
If there is a problem, finding out how it came about and how it may 
be resolved can only be determined from assessing the facts. So the crucial 
skill in the assessment is asking questions and building up a mental picture 
of the issues. As discussed before in the section on negotiation in Chapter 7, 
gathering information into a mind map can assist the process. It can also help to 
communicate the problem to others, especially those who would like to ‘stepin’ 
and take charge for their own reasons. 
Having taken the time to confirm a problem exists and having determined why 
and how it came about the opportunity exists to create a plan which will be 
appropriate, timely and thorough. The laer point is the most important as the 
thoroughness of the plan will mean the action taken will follow through to take 
care of side issues and so be more than a quick fix. 
Aer the brief hiatus of the pause a proper review of the facts, and the creation 
of the plan to deal with the main issue and its side effects, it will be possible 
to take action which can be decisive, comprehensive and appropriate to the 
The combination of this simple sequence can be a powerful ally during the 
cut and thrust of a transaction particularly aer the execution of the contract 
when a series of events will rapidly unfold, a number of which will not have 
been foreseen prior to the closing. But it is at this point that the management 
of an alliance starts to take effect, and the essential feature of an alliance is 
that it is a dynamic relationship between two partners; it should not rely 
upon one party enforcing its rights under contract without the complicity and 
compliance of the other. In order to gain these the structure of the contract, 
while precise in its language, should not be so inflexible that it cannot 
accommodate to changes in circumstances. In order to achieve this, there 
must be a method of governance for the alliance with suitable representation 
from both sides.

Alliance management 
The most common structure in a licensing agreement to deal with maers of 
governance requiring decisions which involve both parties is a joint steering 
commiee. The structure of such a commiee and the voting rights will be 
stated in the contract and it is commonly the case that the senior partner will 
usually have a casting vote when the commiee comes to a split decision. Most 
oen the commiee will be working towards a single purpose and disputes 
will not arise, however there can be occasions, particularly where details 
of a strategy have not been foreseen, when one partner needs to take the 
lead. Seniority in such cases is typically a function of the amount of finance 
provided to a transaction, but can sometimes be a retained right of the patent 
holder especially when other indications are to be developed for the molecule 
involved. The commiee will meet regularly on a fixed schedule to review 
project progress and the achievement of results. Where the project involves a 
clinical development programme, the commiee may also oversee the clinical 
development plan and individual clinical trial designs and their presentation 
to the regulatory authorities. 
Figure 9.3 Joint steering commiee 
Alliance Director Alliance Director 
Function Heads Function Heads

The joint steering commiee is not intended to manage the alliance on a dayto-
day basis. That responsibility will lie with the project leader, or leaders, 
depending upon the scale of the relationship. Quite oen larger companies will 
appoint an alliance manager to whom several project managers may report. 
The alliance manager’s role will also be defined closely in the contract and in 
everyday business the alliance manager will have the delegated authority of 
the joint steering commiee. Individual project managers in such functions as 
manufacturing, development, regulatory affairs, or medicinal chemistry will 
pursue their tasks in their own teams and follow the overall project plan under 
the guidance of the alliance manager. 
The alliance manager role, however, extends beyond the maintenance of a 
project plan and reporting to the steering commiee. They will typically also 
have an internal reporting line to management within their own company. 
The purpose of this reporting line is to ensure that the goals of the individual 
company are satisfied in the achievement of the project objectives and the 
maintenance of the relationship with the partner. The relationship needs to 
be sponsored at many different levels as will the peer-to-peer relationships 
between scientists and other functional staff. These will be complemented by 
financial relationships managed through the corporate finance function and 
management relationships beyond the joint steering commiee which address 
the common objectives of the two companies as well as their individual 
Successful alliance management is characterized by strong communication 
skills and links, frequent interaction and the building up of trust. Emphasis needs 
to be put on communication and documentation as these are crucial elements 
in successful alliance management. The need for coordination is uppermost 
in such complex relationships which may involve multi-site or multi-country 
interactions. Use of video conferencing and teleconferencing facilities, together 
with intranet or extranet connections, enhance the capabilities of alliance 
teams dramatically by providing the opportunity for personal interactions on 
a frequent basis without the need for constant travel. It is nevertheless the case 
that inter-site visits will continue to be a mainstay of alliance management. No 
maer how efficient electronic communications are, the need for individuals 
to meet, exchange ideas and become friends cannot be ignored. When two 
teams are expected to work together over many years, meeting in person is 
an important component of interpersonal relationships. As a result the social 
aspects of an alliance can become some of its greatest strengths.

Investment in alliances is one of the major success factors of modern 
pharmaceutical business, each of the larger companies can boast well over 
50 continuing alliances at any one time; a major commitment of people 
and resources over and above the internal research and development 
obligations. This reflects the focus of an industry where innovation is 
the only justification for premium pricing and the pursuit of innovative 
medicines is the single most sustainable route to continuing profitability. 
Without the ability to establish and maintain effective alliances large-scale 
pharmaceutical endeavours would founder. Honing the skills required for 
managing alliances is therefore an integral part of business development in 
the twenty-first century. 
Dealing with problems in alliances 
Unfortunately not all alliances proceed according to plan; throughout the 
course of an alliance which could last 5 or 7 years personnel will change, 
objectives will alter and science will advance. Consequently there will be plenty 
of opportunities for changes of heart, changes of mind, misunderstandings and 
good old fashioned mistakes. Alongside possible strategic changes of direction 
at some point there are likely to be disagreements in interpretation of results 
and a consequent dispute about the appropriate next steps and which direction 
to take. The joint steering commiee has the task of arbitrating issues that 
cannot be resolved at team level. As noted above the commiee will normally 
have the right to decide issues by vote and in the case of a tie the casting 
vote will go to the senior partner. However, it may be that the joint steering 
commiee itself adopts a position which the management one of the partners 
finds unacceptable and therefore puts it in conflict with its partner under the 
terms of the contract. 
Although such conflict can arise from any one of a number of sources, 
conflicts can be resolved with lile difficulty if a formula for bringing about 
a resolution has been put in place beforehand. Lack of such a mechanism can 
lead to a cascade of disharmony following a path which can end either in 
disengagement, renegotiation, arbitration, litigation or finally termination. 
Disengagement usually comes about as a result of issues which arise from 
external constraints and not through the fault of either of the parties. It might 
be that a competitor invalidates a patent involved in the project, or perhaps 
produces a superior product which removes the potential value of the asset. 

In either of these cases pursuit of the development may become irrelevant to 
the business case of one or other partner. Alternatively the asset itself may not 
perform well in the clinic or may be found to have long-term toxicity problems. 
This last issue is the most common reason for disengagement of parties in 
an alliance and is usually dealt with by following the course set down in the 
contract for that eventuality. 
There might be cases where force majeure prevents successful completion 
of an alliance. Examples of this are a natural disaster or the revolutionary change 
of government in a country. The decision to disengage and end the contract in 
cases of this kind would be taken independently by the managements of the 
companies and a proposal would be drawn up by one or other to abandon the 
agreement. If there were to be any persisting value to one of the partners in 
the IP or in any of the work conducted during the alliance then the proposal 
might include an offer for those rights. The essential aim in circumstances of 
this kind is that the situation is amicably resolved through discussion and a 
joint decision is made. Following a resolution of this kind where the outcome 
is suitable to both parties a joint press release is oen made to note the passing 
of the alliance with guidance for the financial community. 
Figure 9.4 The terminal cascade 
Terminal cascade 

Where there is some disagreement between the parties there may be a need 
to renegotiate the terms of the contract to reflect changes in circumstances, 
especially if there is a shi in the value of the opportunity in favour of one party 
over the other. This happened to me once when a chance finding came to light 
and altered the course of one of our alliances. Information which emerges from 
the market about a product may have major positive or negative implications, 
and I was standing with the head of research at a company get-together when 
one of the therapeutic area heads from research came over with a fax which 
had been received from an investigator in the US. The investigator had received 
sponsorship from our US affiliate to conduct a study using one of our products. 
The results of the study he had found so exciting that he had immediately sent 
a fax of the results graph to the head of the research group and sure enough 
we could all see that the product was highly effective in treating a serious 
disease and would have a major market potential. Yet there was no mention 
of this disease in the contract between ourselves and the patent holder. What 
was immediately required was a revision to the contract to capture this new 
Novel indications have quite oen been discovered through experimental 
use of products by curious or inventive physicians and this can cause 
contractual difficulties for the partners engaged in marketing the product if 
it has been licensed in for one use alone. Alternatively a company’s rights to a 
product can alter radically in the event that they are the subject of a takeover 
by agreement or as a result of a hostile bid. In the event that your alliance 
partner is acquired by a competitor, renegotiation of the contract may need 
to be urgently undertaken. Even if a change of control clause in the contract 
already assigns options to the parties in such an event, the actual circumstances 
may dictate a different course. 
Another frequent cause of the need for a renegotiation is when delays 
to the regulatory submission, or regulatory approval for a product, remove 
the commercial incentive for continuing the alliance completely or requires 
additional funding for more clinical studies to support the submission, which 
may be a major disincentive to the partners. In either case the contract will need 
to be amended accordingly. Methods for achieving this include an addendum 
or codicil to the contract which can be used to take the special circumstance into 
account. On a more positive note, as in the event of a new indication, it may be 
that a side contract can deal with the new circumstances without there being 
any need to alter the original contract. However, if the changes required are of 

major extent or would so imbalance the original contract, a full renegotiation 
and redraing of the original may be necessary. 
Inevitably there will be some contractual situations where disputes arise due 
to some perceived or real default on the part of one of the parties. When there 
is no clear path to a resolution through negotiation because the disagreement 
is sufficiently intractable, one recourse is to arbitration. In most contracts the 
potential for such a deadlock is recognized by a clause which is inserted to 
specify both the authority which under whose jurisdiction the arbitration will 
be heard, the location of the hearings, in which language they will be heard and 
under the laws of which country. 
These oen tie in with the chosen authority but some exceptions are 
possible, and they can be highly significant as I encountered whilst advising a 
client recently. 
A dispute had arisen with a larger company over the reporting of work 
completed under a research contract. As a result the larger company had 
refused to pay for work which had been undertaken because they had not been 
informed of progress according to the contract schedule, despite evidence that 
the work had been completed. In fact the dispute was motivated not by an 
operational problem but by the desire of the larger company to obtain control 
of the IP without paying for it. The contractual stratagem they were using to 
force the issue with my client was to withhold payment for the completed 
work, placing my client under severe financial pressure. 
Things were not looking good until we examined the contract and found 
that when it had been wrien the arbitration clause had specified Copenhagen 
as the place, under Danish law. When my client realized this they were able 
to take a stand and refuse to be bullied by these ‘strong-arm’ tactics. They 
offered to defend their position by invoking the arbitration clause. Faced 
with this turn of events the aggressor company realizing that the case would 
have to be heard in Danish, had second thoughts. As they were a Delawarebased 
company the fact that they would have to physically be represented 
in Copenhagen and conduct the case in Danish immediately changed their 
aitude. Not long aer this they made an approach through a third party to 
sele the dispute amicably. This was the path that was followed and the bills 
were seled just in time to save my client’s business. 

Companies seem quite oen to agree to terms at the initiation of an 
alliance with lile thought to the consequences of a real dispute occurring 
and an oversight of that kind can be the undoing of careful planning with 
serious consequences when it comes to a dispute. In this case it was perhaps 
also poetic justice that the larger company’s use of the contract as a subterfuge 
was undermined by the fact that they had not bothered to read the contract 
to the end and suffered the consequences. Needless to say the atmosphere in 
this alliance moved from an open cooperative relationship to one of suspicion, 
distrust and protectionism which will inevitably lead to a dissolution of the 
alliance. Yet without the safety net of the arbitration things could have been 
When a case proceeds all the way to an arbitration it needs to be recognized 
that the arbitrator takes evidence in exactly the same way as any court would. 
Consequently the preparation of an arbitration needs as much care as any 
other civil suit. The grounds must be established, the evidence gathered, 
the documentation located and the witnesses selected. When it comes to the 
presentation of the case it is necessary to be willing to last the course and to 
pursue your interests to a final conclusion. It is also worth remembering that 
arbitrators are not just there to examine the contract and decide the case on 
points of law: they may be swayed by the credibility of witnesses and can find 
for one side or the other on more than legal grounds only, especially when it 
comes to the judgment and the awarding of compensation or damages, and to 
ruling on issues of ownership or fault. This can mean that at least one of the 
protagonists may be unhappy with the result of the arbitration and wish to 
appeal the decision. As long as is it has been provided for in the contract there 
will be a right of appeal should the arbitration be inequitable to one partner 
or the other. If the contract can require that the arbitrator’s decision must be 
accepted as final, any decision to go to arbitration needs to be weighed very 
carefully and other negotiated options considered. A negotiated selement is 
always preferable, and arbitration and litigation should be the last resorts of 
any dispute resolution process. 
In the final analysis, if one party believes it has been significantly disadvantaged 
by the other and has had damage caused to its business through major abuse of 
its IP or breaching of exclusive contractual rights, it may be that litigation is the 
only suitable course remaining. Needless to say litigation is not a trivial maer: 
the costs can be extremely high and the result of a defended case will always 
be in some level of doubt.

If there is no alternative to litigation certain issues need to be borne in 
mind. Firstly, who is the defendant and who the plaintiff? A significant burden 
of proof and what are called ‘sufficient’ grounds are required to instigate 
litigation. This is intended to prevent spurious or frivolous suits being brought 
about by companies jockeying for competitive advantage through the practice 
of launching a suit against another company. This has become seen much more 
oen and this trend looks set to continue. The corollary of this trend is that 
all companies engaging in alliances need to be prepared, and to be prepared 
means rigorous aention to the creation, execution and operation of the alliance 
In preparing a case there are great many issues to be decided much of which 
can only be evaluated on the advice of legal counsel. Depending on the legal 
advice about the grounds for the case, the defendant may be able to challenge 
the suit and force a change in jurisdiction or from one level of court to another, 
from district to state (or vice versa) or to the judge’s chambers for summary 
judgement – any of which may improve their chances of prevailing. In the same 
way the legal advisors may be able to modify the choice of suit to be presented 
or defended by negotiation with opposing counsel or with the court to improve 
the chances of success. 
Within the choice of suit as noted above is the choice of grounds for bringing 
the case. Some grounds may be stronger than others (meaning more likely to 
win the case) but the victory may provide less relief from the cause of the suit, 
such as a temporary injunction rather than a permanent one. The choice of 
grounds is therefore usually made on the basis of a higher likelihood of success 
rather than extracting the maximum punitive result. Another aspect of prime 
importance is the presentation of the case. The choice of witnesses can be highly 
significant; experts can assist if they are persuasive and well versed but can 
be a hindrance if they are poorly organized or uncertain in their presentation, 
particularly under cross-examination. 
It is also worth bearing in mind that when engaged in litigation the legal team 
for the opposition has a right to information to present their case. This can mean 
that in accepting the defence of a case you concede the right for the plaintiff’s 
lawyers to enter your offices and make copies of any information in your files 
even though you may consider this commercially sensitive, confidential or 
even private. In certain legal jurisdictions it is perfectly permissible to admit 
into evidence handwrien marginal notes made by aendees at meetings, 
whether on scratch pads or presentation notes. If these were to include personal 
observations regarding a member of the other party’s delegation this may be 

offered as evidence of an antagonistic aitude. There have even been instances 
where extensive doodles on the meeting notes of one of the aendees have been 
presented as evidence that the meeting was not being taken seriously! This 
kind of evidence collection and utilization is a warning to us all to be extremely 
careful in our approach to business development negotiations. Unprofessional 
acts have a nasty habit of being exposed and being used in evidence. 
As noted above, when a judgment is rendered it may satisfy one or other of 
the parties or indeed neither. Courts of justice will rule on points of law and on 
the judge’s opinion. If the case brought before it is thought to be spurious, weak 
or malicious this may result in an unsatisfactory judgment or the case might 
be dismissed entirely, preventing further legal action. This is part of the risk 
in undertaking litigation as the protagonists will have involved a third party 
whose interests are not aligned with either of their own. 
If allowed by the court an appeals procedure is oen pursued and yet again 
there must be sufficient grounds for such an appeal. This whole process can 
swallow up time and expense to an enormous degree – even to the point where 
the litigation overshadows the business of the company. Some companies have 
become notorious in business development circles for their rapid and ready 
resort to law to solve their problems or disrupt the business of competitors. It 
would be nice to think that these practices will not proliferate further but in 
view of the litigious hostilities between research-based companies and generic 
manufacturers this is not possible. The balefront is entrenched and the law is 
the primary means of aack and defence. 
When all else has failed the means to terminate an alliance, a licence or a contract 
should be provided for by a termination clause. 
As observed before, a benign requirement for termination of a contract might 
be when the scientific evidence no longer supports the continued development 
of the product. Both parties will regretfully conclude that there is no future 
in the alliance and that the best course of action is to trigger the termination 
clause by mutual consent. Another significant cause of the terminations of 
alliances is a change of priorities in a big pharmaceutical company. This is 
frequently the result of a change in the perceived value of the product. If, for 
instance, the results of a Phase II study demonstrate that the product has some 
safety concerns which will limit the number of patients for whom it may be 
used, or if in a Phase III study the efficacy is found to be less than the target 
product profile (restricting the claims that could be made for the product, and 

so its likelihood of receiving reimbursement by health-care providers) then 
continued investment in the product will no longer makes sense. In such a case 
a unilateral termination of the contract may be initiated and the licensed rights 
returned to the originating company. 
It is typical to find clauses in contracts between larger and smaller companies 
which provide a ‘step-out’ of the alliance contracts for the larger company with 
minimal obligations. These are usually a prerequisite in alliances where proof 
of concept is needed to proceed with the product development. The change 
of control provisions discussed earlier are also a form of step-out trigger and 
are a regular cause of alliance terminations. However it is also not unusual to 
find that this is expressed as an option to terminate rather than as an automatic 
event. The company can choose to exercise this right but is more likely to use 
the opportunity to seek to renegotiate its rights in an aempt to achieve beer 
conditions or terms in the alliance agreement. 
When considering termination certain pitfalls need to be avoided. These can 
include persisting rights to assets or non-terminating contractual obligations. 
Wherever possible the termination of a contract should be by agreement of 
both parties and whenever undertaken all documentation of the termination 
of the transaction should be archived. By archiving the data properly with full 
cross-referencing of documents later disputes or due diligence by potential 
acquirers can be facilitated and act as a protection against claw-backs to cover 
persistent obligations. 
As this book goes to press the recent rulings by the US Supreme Court 
on the KSR vs Teleflex case has altered the landscape once more. This ruling 
changes the accepted definition of ‘obviousness’ in a patent claim. This will 
have a major impact pharmaceutical alliance management. The KSR vs Teleflex 
case has been magnified in its importance by another case in 2007, Medimmune 
vs Genentech, which establishes the right of a licensee to challenge the licence 
contract without the need for a breach of contract to have occurred. The 
combination of these two rulings will have far reaching effects and must be 
urgently addressed for both existing and new alliance contracts.