When I bought my first car, just as I was about to sign the paperwork.  The dealership brought in “the closer.”  A closer is a person who you have not met before.  You may have spent a substantial amount of time with your counterpart—in my case, it was the salesman who showed me various models and took me on a test drive of the model I wanted.  The idea of using a closer is that, without an emotional connection, the closer can be hard nosed driving the final bargain.

As I sat across the desk from the closer, she made it clear that even though the antitheft system was an integral part of the car, it had not been included in the price I was quoted.  So, I actually need to pay more.

Fortunately, I had an ace up my sleeve.  When I was talking with the salesman, I said to him, “Would you write down the number I need to put on the check?”  So, I had the price that he had promised me.  I looked the closer in the eye and said, “That’s not the price I was quoted.  You need to talk with your salesman.”

In short, I prepared for the closing during the negotiation.  I had also researched the price ahead of time.  It was such an oddly specific number, that the salesman had said, “Where did you get this number?”  He knew that I had found his true bottom line.

In today’s post, we discuss tips for closing a deal.

Two Types of Negotiations

Broadly speaking, there are two types of negotiations—those in which relationship is important and those in which it is not.  The California car dealership I described above was an example of the first type of negotiation—they did not really care if I walked away from the negotiation feeling a little burned.  Since I was not going to purchase another car for five to ten years, any repeat business I might bring them was long away.

An example of the second type of negotiation is salary negotiation.  The employee wants the most she can get out of the negotiation, but she will also have to work with her supervisor in the coming months and years.  Ideally, the employee preserves the relationship with the supervisor by presenting reasonable salary expectations.  A summary of the tactics and processes appropriate for the two different situations is:

In both types of negotiations, your side should have gamed out the negotiation in advance.  The difference is that the two disparate goals (outcome maximization versus relationship preservation) lead to different tactics and processes.

Time and Timing

One important aspect of the process is time and timing:

• Will there be rounds of negotiation?
• How soon will responses be expected?
• When can a final result be expected?

Whether deadlines are real (for example, a specific time when a product is required) or artificial (for example, a deadline to conclude a due diligence process), they create a sense of urgency that can allow hard decisions to be made more easily.  Consider time and timing as important details of the negotiation to be agreed on in advance.  An example of time working in favor of an agreement is Day 12 of the Camp David Peace Accords negotiation—so much had already been invested in the negotiation that it was impossible for each side to walk away, but at the same time, it was impossible to keep so many national leaders in one place indefinitely—decisions had to be made quickly.

Keep Your Eye on the Ball

In a long negotiation, it is possible to become lost in the negotiation process.  Asking “why are we here” and “what are we trying to achieve” can help when the goal becomes obscure.  Consider the case of the negotiation to end White minority rule in South Africa.  For the African National Congress, the goal was always eventual majority rule.  So, in 1992, when the question of a 5-year government of national unity came up, it was easier for the ANC to say yes to less than they wanted because they saw that they would eventually reach the goal of majority rule.  In that case, agreement on a government of national unity along with amnesty for political crimes was critical to closing that round of negotiations.

Bring in the CEOs

The negotiation team has often done all that it could to bring two sides together, but they cannot quite bring the deal to a close.  Chief Executives often have a better sense of what their companies can tolerate versus what it cannot.  CEOs may be able to make concessions and claim critical outcomes in a way that lower-level negotiations cannot.

Agree on the Big Picture

Business deals often start with a term sheet—a bullet point listing of material terms and conditions to an agreement.  The advantage is that a term sheet fixes the major features of a deal, but it leaves the final terms to be negotiated subsequently.

Announce a Settlement

This is a high stakes strategy, but sometimes the glare of publicity is what is required to close a deal.  Announcing a settlement combines several of the above strategies at once.  Usually, there is an agreement on the big picture—this allows the parties to have confidence that a deal can be done.  At the same time, an announcement of a settlement creates an artificial deadline.  It will rapidly become clear that the deal has not been inked if the remaining negotiations drag on, and rivals may have time to swoop in and sabotage the deal once the true status of talks becomes clear.

Look at the Details

Yes, it’s important to think about the big picture, but details are also important.  You may be tired from negotiating each term, but you still have to read the final agreement and make sure there are no surprises.  And, you need to be ready to stand your ground if the other party tries to insert a last-minute claim.

Disclaimer:  DiscussingTerms^TM provides commentary on topics related to negotiation.  The content on this website does not constitute strategic, legal, or financial advice.  Consult an appropriately skilled professional, such as a corporate board member, lawyer, or investment counselor, prior to undertaking any action related to the topics discussed on DiscussingTerms.com.

The post Tips on Closing a Negotiation appeared first on discussingterms.com.

In today’s post, DiscussingTerms addresses how patent litigation is settled—using the example of biosimilar pharmaceuticals.  Biosimilars are the generic versions of expensive injectable medications like Remicade, Enbrel, and Humira.  Biologics and biosimilars are a rapidly growing segment of pharmaceuticals, so there is a lot at stake financially and medically.  The focus of this post is on how settlements are valued and how a zone of possible agreement between the parties involved in patent litigation can be established.

Background

Here is a quick introduction to biosimilar litigation:

• In 2009, the Biologics Price Competition and Innovation Act (BPCIA) was passed into law to create an approval pathway for generic versions of biological drugs (“biosimilars;” generic versions of medicines like Remicade, Enbrel, and Humira).  The reason that a separate approval process was required is that biological drugs are much more complicated to manufacture than small molecule drugs (like antihypertensives and antibiotics).
• Within the BPCIA are provisions which require the “patent dance”—disclosure of the biosimilar drug manufacturing process by the biosimilar manufacturer to the initial manufacturer (“innovator”).  This allows the innovator to consider whether any patents held by the innovator have been violated by the biosimilar drug manufacturer.  The reason it is called a “dance” is that there are several rounds of communication back and forth (like a dance).  If any areas of dispute cannot be resolved, litigation may follow.

This form of negotiation is a classic adversarial or competitive negotiation.  Demands, threats, and the use of power (through the courts) are expected in this negotiation.  The goal for each side is a “win”—the innovator wants to block the biosimilar from entering the market, and the biosimilar manufacturer wants to launch their drug as soon as possible to take market share from the innovator.

In these negotiations, accommodative behavior may rarely come into play (if by chance the two companies involved have other projects that they are working on together and want to preserve their relationship as a way of maximizing the return from the other activities that involve them); however, the norm in this type of negotiation is competition.

Assessing Risk, Cost, and Profit

Many business processes such as litigation [1] and option pricing [2] involve some degree of risk combined with possible costs or profits.  Such processes can be represented as trees of probability and value.  As an example, consider this tree describing the possible outcomes of BPCIA patent litigation over pegfilgrastim in 2020:

This tree structure considers the possibility that a purely hypothetical pegfilgrastim patent case was brought in 2020.  Though the tree is hypothetical, the values in the tree were estimated using real market and litigation data, as will be seen below.  Consider the following aspects of the tree:

• Structure:  The tree structure assumes that a case is brought by a plaintiff (i.e., innovator pharmaceutical company) against a defendant (i.e., biosimilar pharmaceutical company) for patent infringement in manufacture of pegfilgrastim.  The possible outcomes of this litigation are a verdict for the plaintiff or for the defendant (the two lefthand branches of the tree), and if the verdict is for the plaintiff, a range of possible penalties may apply (the two righthand branches of the tree).
• Probabilities and Penalties for Defendant:  To be as realistic as possible using publicly available data, DiscussingTerms developed a database of US district court BPCIA litigation [3].  In the database, ten cases were pursued all the way to a trial outcome, with seven determinations for the defendant and three for the plaintiff.  Using this data, the chance of a verdict for the plaintiff is 30% (versus 70% for the defendant).  In the case of a verdict for the plaintiff, 3 cases provided example penalties (two cases for patent infringement of Enbrel resulted in 9-year delays to the market when patent protection was upheld, and one case for patent infringement of Epogen resulted in a $70M penalty).  Assessing what the penalties might be imposed is case specific, these values from cases other than pegfilgrastim were used in the tree structure above purely as examples.  Of course, each litigation team would spend time creating a tree specific to their case.

• Rewards for Defendant:  Having considered the possible penalties, what about the rewards?  Pegfilgrastim is a biologic used primarily in supportive care of chemotherapy patients to boost their immune cell level.  Market projections for North America starting in 2020 are shown above [4].  Assuming that early entry into this market would lead to 50% market share and late entry would lead to 10% market share, the revenues for these two scenarios are shown in 4^th and 6^th columns.  The net present value (NPV) in 2020 for an early entry can be calculated at $4.7B (a late entry would yield $931M in value).  In the tree above, a late entry was assumed, so value for a verdict to the defendant is shown in the tree as $931M. (Note: Back in the day, entry date was part of the negotiation between a pharmaceutical innovator and a generic. The FTC now guards against such “pay for delay” agreements. The reason to consider early versus late entry here is that clinical and CMC considerations limit how quickly a biosimilar makes it to the market. It is worth examining whether and how entry date affects this type of negotiation. See the table of expected outcomes below for a comparison.)
• Value to the Defendant:  The value to the defendant is the weighted average of the possible outcomes:  (30% x 67% x $0)+ (30% x 33% x ($931M-$70M))+ (70% x $931M) which equals $737M.  This value exists as a purely theoretical amount—if the litigation is pressed to conclusion, the biosimilar company will receive one specific value ($0, $861M, or $931) depending on the verdict.  The ultimate value hangs in the air like the fate of Schrödinger’s cat.

• Value to the Plaintiff:  The tree looks different to the plaintiff (see 2^nd tree shown just above).  The probabilities of this 2^nd tree remain the same as those in the 1^st tree, but the outcome values differ.  If the defendant prevails, then the plaintiff receives nothing, so that branch is valued at $0.  A verdict for the plaintiff contains a 33% chance of a $70M judgement to the defendant.  A 9-year delay (67% change if there is a verdict for plaintiff) takes the defendant out of the North American market for pegfilgrastim, so the innovator may receive the value that would have been provided to the biosimilar company ($931M) if the innovative product is able to capture those sales.  The weighted average for this tree is:  (30% x 67% x $931M)+ (30% x 33% x ($70M))+ (70% x $0) which equals $194M.

The Negotiation

Litigation under BPCIA is an example of a multiparty negotiation (involving innovator company, biosimilar company, legislature, courts, insurance companies, doctors, and patients).  However, there are three parties with the most immediate sway in this type of negotiation (the two pharmaceutical companies and the courts).  Their positions are as follows:

• Courts:  The courts enforce guardrails on the negotiation.  The BPCIA mandates the patent dance, and both companies are required to negotiate in good faith during this process.  Failure to abide by the patent dance process can lead to penalties.  Also, the courts have found that certain types of settlements are anticompetitive and violate antitrust principles (see:  FTC v. Actavis, Inc., 570 U.S. 136 (2013)).  So-called “pay-for-delay” agreements, in which the innovator pays a generic or biosimilar company to stay out of the market, can be challenged by the FTC under these principles.
• Defendant:  The biosimilar company’s primary goal is to avoid achieving a $0 value.  To prevent this disastrous outcome, they would be willing to concede some value, but how much?  We’ll see below.
• Plaintiff:  The innovator faces a decline in revenue due to erosion of the price for pegfilgrastim and the entry of competitors taking market share.  Through this negotiation process, the innovator hopes to salvage some revenue from this product line which is reaching the end of its product lifetime for the innovator.  How much value might they be looking for?  Again, we’ll see below.

The zone of possible agreement (ZOPA) is a range of settlement values that satisfy both parties.  In this case, the settlement involves direct cash payments or a share of future revenue, but it cannot involve a pay for delay agreement.  What range might satisfy both parties?  Consider the following table:

In this table, the case of late entry into the North American market (10% share) is shown at the top of each entry; the case of early entry (50% share) is shown at the bottom of each entry in parentheses.  Both parties wish to avoid their worst outcome.  In each case (late entry and early entry), if the biosimilar company is willing to concede the difference between its best outcome and its expected outcome, the freed cash satisfies the innovator’s expected outcome.

Other factors will also come into play:  the relative strength or weakness of the patent infringement case, the bargaining position of the biosimilar company (are they short of cash or deep pocketed), the number other biosimilar products and their expected launch dates, etc.  However, this analysis does indicate that a zone of possible agreement between the two parties may exist.

Conclusions

Creation of a case-specific model of value which builds in the most relevant data on risk and potential cost and profit can be a useful tool of negotiation preparation.  These types of models help the negotiation team think several moves ahead in the bargaining process, as well as allowing the team to put themselves in the place of their adversary.

Some other issues to bear in mind include:

• Framing:  Whether a particular outcome is framed as gain or loss has strong psychological effect on humans.  Craver goes into this topic in some detail [1].  In considering a settlement, the litigant is well advised to consider emotional factors which influence their point of view.
• Hidden Costs:  It is important to consider all of the costs within this type of negotiation:  litigation costs, impact of the litigation on public perception (does the uncertainty of litigation frighten potential business partners or investors?), opportunity costs (do the rigors of preparation for a trial distract from other business activities?), etc..

All of these issues come into the decision of when and how to settle; however, as some wise person once said, “There’s always a number.”

[1] Craver, C.  Effective Legal Negotiation and Settlement, Carolina Academic Press (2020).

[2] Metrick, A.  Venture Capital and the Finance of Innovation, John Wiley & Sons, New York (2010).

[3] US District Court BPCIA Litigation, DiscussingTerms, December (2022):

[4] Research and Markets.  Global $4,037 Million Pegfilgrastim Biosimilars Markets, Analysis & Forecasts, 2015-2020, 2025F, 2030F, www.globenewswire.com/fr/news-release/2022/03/16/2404168/28124/en/Global-4-037-Million-Pegfilgrastim-Biosimilars-Markets-Analysis-Forecasts-2015-2020-2025F-2030F.html

Disclaimer:  DiscussingTerms^TM provides commentary on topics related to negotiation.  The content on this website does not constitute strategic, legal, or financial advice.  Consult an appropriately skilled professional, such as a corporate board member, lawyer, or investment counselor, prior to undertaking any action related to the topics discussed on DiscussingTerms.com.

The post <strong>Negotiating a Settlement:  Biosimilar Pharmaceuticals</strong> appeared first on discussingterms.com.