How to implement and perform effective scientific and technological due diligence?

Dr. Diane Seimetz, Co-Founder of Biopharma Excellence, participated at Biofit 2015 as Chair of the panel discussion on due diligence. In the following a detailed report on the key content of the discussion is provided. 

A. Background

Externalization through product licensing, program partnerships, or company acquisitions is set to be the leading growth strategy for 2015 and beyond. Whether it is for a M&A or partnering agreement, licensing products or technology platforms a biotech company should be ready to present their assets to potential partners.

Due diligence is essential to be successful in biopharmaceutical partnering for both, the licensor and licensee. Due diligence is a complex analysis of the scientific, technical, legal and financial data that needs to be well prepared and thoroughly conducted.

The following experienced experts shared their experience on the fundamentals of due diligence including real life examples during the 4th Biofit partnering event on 2ndDecember 2015:

  • Cadman Martin, Director Scientific Licensing, GlaxoSmithKline, UK
  • Jessop Carl, Due Diligence Director, AstraZeneca, UK
  • Malek David, VP Business Development, BioLineRx, Israel
  • Seimetz Diane, Co-Founder, Biopharma Excellence, Germany (Chair)
  • Théard-Jallu Cécile, Partner Attorney, De Gaulle Fleurance & Associés, France

In particular, the panel discussed how a biotech company or early start-up organization can best prepare for a due diligence under consideration of the expectations on pharma’s side. Key stake holder in the due diligence as well as best timing and duration of the overall process were addressed. In addition to scientific considerations legal aspects were highlighted.

After the discussion the panel concluded on the most important Do’s and Don’ts for an effective due diligence, which are provided in this report under section C.

The audience learned or gained additional knowledge, depending on their level of experience, to either prepare to host a due diligence by other companies or to conduct a DD on another company.

B. Important questions and answers

How can a biotech company prepare for a due diligence by big pharma?

A biotech company seeking to outlicense their technology or products should be aware that the preparation for a due diligence takes place every day and well in advance of a potential deal. This means from the very early start the development process and resulting data should be documented accordingly. It was strongly recommended to document all results in English. In addition, the biotech company should consider early on the most appropriate strategy to protect and add value to the technology and products including appropriate territories. Likewise it is important to identify early on the corporate entity that shall own the technology. A common pitfall is to forget that individuals are always at the origin of the creation of immaterial assets. It is important to secure the appropriate corresponding transfer of rights for the benefit of the company that is susceptible of becoming the target of an in licensing or shares purchase project.

When presenting the technology and data to a potential partner it is essential to have a well-structured data room available that is convenient to navigate. All important results should be presented and discussed under confidentiality. In particular potential issues should be openly addressed.

What are key factors for success?

It is important for a company who seeks to outlicense their technology and/or products to know the data very well and to be prepared to explain them.

Not only the own technology should be known, it is also essential to understand the competitive landscape well including potential infringers.

Potential issues should be proactively addressed combined with an impact assessment. Mitigation strategies and plans should be suggested.

A due diligence process is an intensive, time consuming process. Each partner will need to ensure to have appropriate internal resources readily available. Answers need to be provided in a timely manner. It was considered very helpful during the panel discussion to channel the Q&As during a due diligence process though a dedicated person on both sides.

A thorough project management including kick off was considered a key factor for success of a due diligence. Face to face meetings are important to foster mutual understanding of data, potential impact of issues and to get open items quickly resolved. Thereby a crawling process can be prevented.

What areas are often missed or underestimated when preparing for a due diligence?

In particular for biopharmaceutical drugs a lack of clear understanding of manufacturing and control issues was noted, in particular by the large pharma representatives.  Key considerations on developability and identification of an appropriate formulation approach were noted as frequently missing. In particular at later development stages this may trigger substantial rework or create problems that could only be solved at high cost, which may put a project at risk.

For early stage projects an important challenge is the identification of a lead candidate. A true lead candidate is a promising product development candidate with defined characteristics that is worth being progressed thru the development chain. However, during the panel discussion it appeared that in particular young start-up companies or academia present just molecules instead of a true lead.

The availability of biomarkers was considered a very important value driver. Some companies even follow the strategy to license products or technologies only in case biomarkers are available that allow to early assessment of efficacy signals. This should be thoroughly considered and planned during early development of a new technology or therapeutic approach.

It was also noted during the panel discussion that the companies offering their technologies and/or products are very familiar with their approach, whereas there seems to be insufficient understanding of the competitive environment. This is essential for proper differentiation, IP strategy and freedom to operate issues.

As operational issue it was discussed that for a small biotech company a due diligence process constitutes a challenge as key people need to deal with the process while at the same time need to ensure that the day to day business keeps running. Therefore, proper planning and timing is considered essential.

How long does the due diligence process take?

There is no simple answer to this question. The panellists indicated that they were involved in so called text book examples of due diligence with an overall duration of only several weeks. However, there were also experiences with so-called ”crawling due diligences” that took for more than 2 years. For a text book example with a duration of only a few weeks the following ingredients are important for success: very high interest of both partners to collaborate, full management commitment, availability and commitment of key resources and face to face interactions to solve outstanding issues.

Once there is an agreement on the deal terms the legal process takes only a few days.

Who and how many are involved in the process?

This clearly depends on the development stage of the asset. For early stage assets less people are involved than for late stage assets. For assessment of early stage projects the panellists indicated that approximately 10 to 15 people take care of the project whereas for late stage projects, the team can comprise up to 40 members. The more advanced the projects the more clinical as well as pricing and reimbursement experts are involved.

The panellists indicated that they have very good experience with a gate-keeper who oversees the whole process and who ensures appropriate channelling of the Q&As. This person is typically a member of the business development or licensing department.

External consultants are also involved in the due diligence process by companies who seek to in-license assets. Typical examples are when a company performing a due diligence is looking into a new area where they have limited experience or in case there are not sufficient in-house resources available. Is some cases independent peer reviews are requested before final decision making.

Small and mid-size biotech companies who are looking for a partner also involve external experts e.g. to prepare for the data presentation and discussion as well as for legal aspects.

What is the best timing?

The answer to this question was a matter of debate. Some panelists made good experience with the efficient conduct of a due diligence after the term sheet was agreed and signed. Others had the experience that starting with the scientific due diligence before term sheet agreement was beneficial for the overall process as the discussion of a term sheet can take fairly long.

Whichever approach potential partners are taking having a clear timetable agreed is important for the efficient and fast conduct of a due diligence.

C. Eight key Do’s and Don’ts for successful due diligence at a glance

The eight most important Do’s

  • Set up a good quality data room with all important plans and results
  • Know your data, be prepared to explain them and to address questions in a timely manner :
  • Consider risk mitigation strategies for challenges and potential risks
  • Have appropriate internal resources readily available including a gatekeeper for the Q&A process
  • Know the competitive landscape well including potential infringers
  • Plan for face to face meetings to foster mutual understanding of data, issues and mitigation strategies
  • Ensure commitment from both parties to the process
  • Be open and honest in your questions and answers

The eight most important Don’ts

  • Lack of transparency or even hiding of critical issues, it will bounce back sooner or later
  • Not making sure that key rights on technology and/or products are belonging to the party who seeks out-bound licensing or is the target of the projected share purchase
  • Not properly mastering the scope and content of the company’s technological portfolio
  • Don’t have information in a very scattered and unorganized manner
  • Don’t continue adding more and more documents to the data room based on requests and leave the reviewing party alone with it
  • Avoid a «crawling» process
  • Lack of communications during the due diligence process to the potential partner and internally
  • Not documenting what was agreed and discussed as players on both sides may change over time