Key Considerations for Structuring a Winning Deal- A Biotech ApproachKey Considerations for Structuring a Winning Deal- A Biotech ApproachThomas Hess

Former Chief Financial Officer of Adolor Corporation Former Chief Financial Officer of Adolor Corporation (currently CFO of Yaupon Therapeutics)(currently CFO of Yaupon Therapeutics)

September 16, 2008© 2008 Adolor Corporation. All rights reserved.

Adolor- Pfizer Delta Collaboration

Considerations and motivations for entering into the deal! Adolor was awaiting approval of Entereg- their lead compound.

The cost of developing a new compound (Delta) is significant.

Risk

Expertise

Focus

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Biotech Perspective Timeline and Activities in Establishing a Partnership

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Engage Parties

Initial Preparation

Due Diligence

Negotiation Execution

• Internal Buy In

• Develop Prospectus

• Identify Potential Partners

• Establish CDA with Interested Parties

• Confidential Presentation (and Sell)

• Initial Discussion on Terms

• Additional Asset Data Exchange

• Draft Term Sheet Exchange

• Establish Timeline for Completion

• Establish Document Room and Media/Forum for Review

• Initiate the Drafting of Definitive Agreement

• Partner Pitch on Collaboration • Draft Agmnt. Exchange

• Multiple F2F Negotiations

•GetAccountant to Review

• Know when to Say “Enough”

• BOD Presentation on Deal Terms and Conditions

• Partner Governance Approval on Deal

• Establish Committee Members

• Plan Your First Post Deal Close Meeting

Timeframe can run from 3 months to + 12 months

n Date: December 2007

n Focus: Delta opioid agonists for pain

n Milestones: $232.5MM

n Back End

United States

Profits/Losses shared 60% to Pfizer and 40% to Adolor

- US development expenses (external) to be shared in same proportion

Rest of World

Adolor to receive royalties on Pfizer net sales

n Provisions for adding compounds and indications

n Development Collaboration

Adolor: IND filings and clinical program through Phase 2a

Pfizer: Subsequent worldwide development and regulatory approvals

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Adolor/Pfizer Collaboration

Recent Benchmark Example Pain Compounds in Phase IIa

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Adolor/Pfizer Targacept/GSK Glenmark/Lilly

Transaction Date December 4, 2007 July 27, 2007 October 30, 2007

Pain Target Delta Opoid Receptor Neuronal Nicotinic

Receptor

Transient Receptor Potential

Vanilloid Sub-family 1 (TRPV1)

Lead Compound ADL5859 TC-2696 GRC 6211

Upfront Payment $30 Million +

$1.9 Million reimbursement for Phase 2a

studies

$20 Million

Plus $15 Million

in Equity

$45 Million

Milestones

-Development

-Regulatory

-Commercial

Total

Not Disclosed

Not Disclosed

Not Disclosed____

$232.5 MM

Not Disclosed

Not Disclosed

Not Disclosed

$1.5 B

Not Disclosed

Not Disclosed

Not Disclosed

$215 MM

Back End US – 40/60 Profit Split

ROW Royalties

Undisclosed Double Digit Royalty ~15% Royalty in the Territory

Territory Worldwide Worldwide North America, Europe, and Japan

Cost Sharing 40/60 US

100% Pfizer in ROW

Targacept to fund through Phase 2

POC. Then 100% GSK if they opt

to take the compound

100% Lilly in Territory - no

mention of access to Lilly trial

data

Co-promote Option Yes – US Specialty Yes – US Specialty for first two

compounds

Yes – US

Adolor had the “option” to attend all JSC meetings!

Adolor is not obligated to attend- collaboration meetings.

Allows for recognition of the up front payment.

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Deal Structure for Revenue Recognition

Accounting for Upfront Payments

Collaboration signed December 2007

Two compounds in the clinic as of the collaboration date.

Adolor is responsible for the development of each compound

through Phase II a and then Pfizer assumes all responsibilty.

Adolor’s project management projects that compound I & II will

be completed in February 2010 (26 months).

Amortize the upfront over 26 months.

Adjust if Phase II takes more/less time.

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Strategies for Communicating & Reporting the Deal Externally

Involve investors relations from both parties up front.

Create timeline for preparation, review, sign off (both parties)

and distribution of press release and Form 8-K

Reach out to the analysts.

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Lessons Learned

Insert yourself early in the process.

Obtain term sheet and draft agreement.

Include the external auditors and audit committee upfront.

Involve investor relations up front.

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