One of the biggest challenges in the biotech industry is how to secure sufficient funding to support product or technology development. Partnering with companies that have capital, as well as technical and regulatory expertise – which, for the most part are larger biotech or pharmaceutical industries – may for many small biotech companies be more appealing than dealing directly with the financial markets. In the post-credit crunch environment, however, capital is no longer available from either the capital markets or industry participants on the speculative basis that was once the norm. Investment on the scale needed to bring a new biotech product to market cannot realistically continue on the basis that 32% of drug candidates are pulled prior to regulatory approval for economic and marketing reasons, as was the case prior to 2009 . Today, projects need to take the economics into account well before the product under development reaches the stage of clinical trials. Non-traditional emerging markets may be as important to a drug’s economic profile as the crowded North American, EU and Japanese markets. Consequently, input from healthcare data and marketing specialists may be as necessary as that from regulatory or clinical specialists, and a portfolio approach to product selection may need to be taken.
Biotech companies must therefore position themselves to work with a growing variety of potential partners or acquirers. This article looks at the factors which will affect a choice of appropriate partner, the form such a collaboration could take and the issues which will influence whether the partnership succeeds or fails.
Why Partner with Other Companies? – Strategies for Growth
The strategic logic driving biopharma partnerships is compelling, based on several factors.
First, the majority of biotech companies are smaller than the longer established pharma players, and consequently have perennial problems finding the cash necessary to put therapeutic products through the gamut of clinical trials required to get marketing authorization. The cost of research needed to reach the early clinical stage is generally taken to be in the region of $30m, while hundreds of millions will be needed for the full clinical verification process. Pharma companies, with a portfolio of established products bringing in predictable revenues, have access to capital which can fund those trials and so enable biotech’s products to reach the market. In the past, pharma investors were relatively risk averse, focusing on projects which had already progressed far enough to have a lower associated risk, but which conversely required ever higher funding in order to complete the assessment and development cycle. However, over the last few years pharma investors’ agenda has changed, with the majority of deals in the 5 years to 2010 being done at the discovery stage rather than later on . The trend is even stronger amongst the larger biotechs. This may reflect a growing disillusionment among pharma companies with the small biotech’s ability to manage the clinical work crucial to later development, as well as projects stalling after discovery because of funding problems. Several large pharma companies are moving towards an explicit venture-capital business model, such as the Merck Research Venture Fund, recognising that their past approach of vertically integrated research and development from candidate identification to market launch is no longer practical.
Secondly, being in partnership with a well-established company can open doors to further deals by giving a company additional commercial credibility. The fact that one known industry player has investigated and assessed it worthy of a financial or other commitment, will give other potential partners a degree of comfort that the company as a whole is following sound management and scientific principles. Indeed, the extent of a company’s network of connections may in itself be a valuable asset, signalling flexibility and the ability to access knowhow from many quarters.
Thirdly, biotech companies can offer both a wide range of new therapeutic candidates and also skills – in very advanced research, out-of-the-box thinking and flexibility in the face of changes of circumstance or unexpected results – which complement well with the skills within the large departments maintained by large pharma companies to handle the formalities required for dealing with the rigid clinical procedures imposed by regulators. Both sides have “assets” which are desperately needed by the other; equally, both stand to gain from teaming up to exploit them since the result should be the launch of lucrative new products earlier and/or more effectively than either partner could have achieved alone.
A word of warning is required though –the success of a partnering arrangement requires sustained commitment from both parties. More than a third of biotechnology alliances get cancelled before the intended endpoint. Further, the form of the deal may be crucial. Agreements signed during periods when little external equity financing is available and that assign the bulk of the control to the corporate partner have been found to be significantly less successful than other alliances. These agreements are also disproportionately likely to be renegotiated if financial market conditions improve .
Diversification, whilst spreading the risk of dependence on a single project, has its own risks. Adequate management capacity is key. Over-reliance on multiple partnering to drive forward many different projects is unlikely to succeed long term for a small company: the drain on management time may simply not be sustainable over the extended time periods typically taken for drug development. A balance, therefore, needs to be struck between the imperative to bring new products to market as quickly as possible and the realistic level of activity a small company can maintain.
Finally, partnering itself is not without risk – the partners may turn out to have incompatible objectives or management systems; the researchers who are intended to collaborate may not form a workable team; or any number of practical problems may arise. The value of pre-collaboration management and cultural due diligence is frequently underestimated.
Different Types of Partnerships and Alliances
Once the details have been hammered out, biotech transactions are frequently complex. But at the simplest level of categorization, the collaboration may take one of two basic forms: either an investment by one partner of resources, leaving the other partner to carry out the research and development work, or actual joint development and ultimately marketing.
Investment can take many forms. The simplest possible form is a cash payment made upfront, and a legal agreement effecting this is likely to be a short and simple document. Such a transfer does, however, result in the investor assuming all of the risk at the very outset, and so it may prefer that payments be structured as milestone payments for successful completion of pre-defined research objectives – particular toxicological or pharmacokinetic studies, for instance, or all Phase I trials. Alternatively, the payments can come in the form of license fees for the use of particular facilities, consultancy or intellectual property rights. Longer-term capital can instead be transferred in the form of loans, with clearly defined repayment triggers – for instance, by reference to royalties on sales of the end product or, if the product does not reach the market by the due date, in shares. In any of these cases, the legal agreement needs to reflect the precise objectives and obligations in detail, and so will be considerably more complex.
If the pharma company wants more control over the activities of the biotech partner, it may take equity at the outset. In addition to an element of control, this also has the advantage of avoiding any direct impact on the investing company’s profit and loss account. Further, the pharma company’s return is not linked solely to the project in question but may come from the success of an unrelated prospect – the risk is diversified. It does, however, introduce the complication of attempting to value a small company with few tangible assets but (in its own eyes at least) large prospects. There are also questions to consider as to how and when the pharma company may retrieve its investment. Finally, while the biotech partner gets the benefit of longer-term investment and the opportunity to form a stronger relationship, it needs to ensure that the terms are not such as to put off other potential partners, such as giving one investor a place on the board.
The second form of collaboration may be through the use of assets such as libraries of compounds, cell lines, specific research tools or facilities, or manufacturing facilities, or at the Phase II stage the assistance of the regulatory and sales expertise of the pharma companies. Legal agreements relating to these more hands-on forms of collaboration will be correspondingly more complex, not least because new inventions or improvements to existing product technology may result, the ownership of which could fall into either parties’ hands. It is also necessary to define how each party is to contribute to, and benefit from, activities which will continue over a considerable period, with the accompanying uncertainty. Nevertheless, the effort is worth it since a partnership which continues through to commercialization can allow the biotech partner a more substantial share in the overall success of the product, compared to earlier models which excluded them (at a price) once the product reached marketability. In practice, however, a pharma partner may not want to continue the biotech’s involvement to proof-of-concept and beyond: the agreement may instead be designed for the project to be taken in-house once a given stage is reached.
Formal joint ventures can be created, where the biotech company licenses a particular candidate compound exclusively to a new corporate entity and the pharma company invests capital and the use of other assets to the new entity. This form of investment shows as an asset on both parties’ accounts. But thought needs to be given to the exit routes and timing for both parties, since the outcome of the initial development may no longer fit with one or both parties’ strategies. Alternatively, if the candidate shows promise in the later stages of development the JV may become a bridge arrangement whereby ultimately the assets of the JV including the research outcomes are acquired by the pharma company outright. In such an arrangement the parties can agree “call” and “put” prices such that when a particular milestone is reached one party has the right to buy or the other the right to be bought out.
Finally, multi-party collaborations can also be designed with one company as project lead but a number of other participants adding specialist knowledge or facilities. The entry cost of such an arrangement is higher, which may provide some comfort that the project is less likely to be cancelled. But on the downside, any given participant may be substitutable if unable to deliver its contribution as and when projected.
Approaches to Partnering with Pharma or Large Biotech Companies
One key issue for the pharma partner will be whether the potential new product fits with their existing therapeutic areas or can otherwise be integrated with their portfolio. Where a biotech’s enquiries are rebuffed, it is most often because the product they are offering simply is not relevant to the pharma company’s business development strategy. It is a rare combination of product and salesmanship that can bring a pharma company to enter a new field or acquire a type of technology they have not previously considered. But if a gap has been identified in the product pipeline which this new candidate could potentially fill, then the chance of a positive response is much higher.
It is also important for any company proposing to partner with a larger firm to research the kinds of deals the proposed partner has done in the past; planning for a similar deal valuation and structure may give the proposal better chances of being accepted.
A positive response, and even a signed deal, is not the end of the story however. The pharma company’s objectives may change over time, and it may conclude that the current project is less valuable than a competing internal project (which may or may not have existed when the current deal was negotiated) and should therefore be shelved. Indeed it is not unknown for deals to be negotiated for the covert purpose of removing from the market a product which potentially competes with one of its own (colloquially known as “buy and kill”). The deal should therefore be structured to ensure that if the partner fails to progress the development process there is an exit strategy at some point. This might either give the larger partner the option to buy the biotech firm or project, or enable the biotech partner to take the rights back and develop the product alone (or in an alternative partnership).
Where the deal includes actual collaborative work, going beyond simple assistance given to the licensee to understand the intellectual property licensed, all work done must be properly documented. Once the joint work goes forward there is the chance that the parties will, in working together, make new inventions. The ownership of rights in such inventions can be difficult to establish: an invention may have been jointly made or, at least have been made by one party relying on the assistance to be given by the other as to particular skills or know-how, giving that other a claim to joint ownership. Disputes over ownership of intellectual property arising from loosely drafted collaborative arrangements remain common, and joint ownership is rarely a satisfactory outcome under European law since a joint owner has only limited rights to exploit the invention. For example, if the licensor has licensed only part of its intellectual property base, intending to develop an allied field itself, rights over inventions made jointly could interfere with its ability to exploit the remainder of its intellectual property.
Nuts and Bolts
The intellectual property to be licensed into or out of the collaboration will differ significantly between therapeutics and diagnostics and platform technologies or tools.
The level of exclusivity, and precisely which intellectual property that exclusivity will attach to, is usually a matter of some debate. Where a patent is relatively narrow in what it protects, the question can be a simple one. However, exclusivity is often tied to a definition of a field of application, and these definitions can be technically very complex. Particularly in early stage work, several possible therapeutic areas may still be in contemplation, but not all be within the licensee’s interest. The implications of various formulations of the definition are properly taken into account in drafting the legal framework for the arrangement. For instance, the expressions ‘all viruses,’ ‘all replicating viruses’ and ‘all adenoviruses’ would each confer a materially different scope of rights.
It is essential to establish clearly and upfront who has responsibility for which aspects of the project – and structure it so that the party with responsibility to carry out those responsibilities also has an incentive to do so. For instance, royalties may not incentivize a partner which has no influence at all in generating sales.
Alliances are a reality of the biotech development process, but the object and form an alliance may take must be carefully defined to minimize the risk that the project fails to deliver. The more research a biotech company puts in to establish the commercial and marketing viability of its proposed product before approaching potential partners, the better the chance that the project will both find a sponsor and reach commercialization. Similarly, the better a biotech knows and understands its potential partner’s business and way of doing business, the more likely it becomes that an agreement can be concluded which satisfies both parties’ requirements. But in all cases, that agreement must be properly documented with a thorough understanding of the intellectual property and regulatory context, to make sure both sides’ legitimate interests are protected, whatever may happen to the project later on.
Lorna graduated in geophysics from the University of Edinburgh and spent several years in research at the University of Cambridge before switching to a career in law. She obtained an LLM in Corporate and Commercial Law with Merit from Kings College London in 1993. She joined Bird & Bird upon qualifying as a solicitor in 1994 and became a partner in the IP Department in London in May 2001. In 2005 she qualified as a Solicitor- Advocate with rights of audience in all courts in England and Wales.
Lorna’s practice focuses on intellectual property protection and enforcement across a range of industries including pharmaceuticals and biotechnology, and in recent years she has also developed expertise in pharmaceutical regulatory matters in Europe. She is experienced in the management of litigation across multiple jurisdictions.
Lorna publishes in a variety of journals on intellectual property and regulatory matters, and contributed chapters to The Pharmaceutical Pricing Compendium (Urch, 2002) and A Guide to EU Regulatory Law (Kluwer, 2010). Her book Electronic Signatures Law and Regulation (Sweet & Maxwell) went into a second edition in 2008 whilst in 2012 she has published Nanotechnology Law: best practices (Wolters Kluwer). She is also co-author of The Copyright Directive: UK implementation (Jordans, 2004), and general editor of Intellectual Property Handbook (Law Society Publishing, December 2007).
This article was printed in the September/October 2012 issue of Pharmaceutical Outsourcing, Volume 13, Issue 5. Copyright rests with the publisher. For more information about Pharmaceutical Outsourcing and to read similar articles, visit www.pharmoutsourcing.com and subscribe for free.