The term sheet: a critical tool in the business development process!

A topic that often triggers questions and discussions during our pharma business development course is the term sheet.

The term sheet is a valuable document that initiates the negotiation between two parties. It is typically proposed by one of the parties and is nothing more than a sketch of their preferred final agreement, laying out the core elements of the  transaction in a logical sequence. In other words, its purpose is to capture the essence of the proposed transaction in writing and to form the framework of the negotiation.

For instance, in the context of a pharmaceutical product license, the term sheet should include at least the following elements:

• The contracting parties
• Purpose of the contract
• The assets
• The price to be paid and how
• The duration of the contract
• Any contingencies or constraints

In the term sheet, “terms” are stated concerning the parties or the assets as either ‘representations’ which the issuer believes to be true or as ‘warranted’ statements where the statement can be held to be true and if false, can be construed as a ‘misrepresentation’ for which the issuer can be held liable. There are also statements known as ‘puffs’ in contract law which are recognized as sales talk and are not regarded as trustworthy. These should be avoided in creating a term sheet and accurate descriptions and definitions used instead.

The other party will then respond by either accepting or rejecting the proposal in whole or in part. It is a good idea to analyse the term sheet carefully, disentangling the motives of the other party from the legal statements. It is important to appreciate the nuances in a term sheet and so, when a proposal arrives, it is advisable to have it reviewed by someone with the skills to see past the words on the page.

The process between the two parties that subsequently unfolds may be rapid or can be long drawn out. Counter-proposals may be exchanged frequently in an attempt 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.