Legal Forum: Putting the "Co" in Development and Promotion: The New Biotech-Pharma Collaborations

Companies considering partnering arrangements must do financial and operational due diligence to ensure the success of the collaborations
Aug 01, 2006
Volume 19, Issue 8

Sergio Garcia
A number of strategic reasons exist for partnering among life sciences companies. For emerging biotech companies, partnerships and strategic alliances provide a number of benefits, including much needed capital infusions, sharing risks for continued drug development, and access to pharma or biopharma clinical, regulatory, or commercialization expertise.

While collaborations between emerging biotechnology companies and pharma–biopharma companies are not new, these deals have dramatically increased in sheer number and deal value. Perhaps the most important recent trend to note is a structural one—a trend of moving away from the conventional royalty model toward 50–50 cost and profit sharing collaborations. Last year even small, emerging biotech companies successfully negotiated balanced deals with 50–50 economics. In spite of the resource constraints small biotech companies face and the inherent complexity in negotiating 50–50 collaborations, these partnering deals are on the rise.


Two main factors are driving pharma's ongoing collaborative fervor. In today's market, pharma companies are experiencing falling productivity from their internal pipelines. Gaining access to new products through alliances with biotech companies allows pharma companies to expand their pipelines and increase their probability of success. Also, due to the complexity of manufacturing, biologics tend to have less competition than conventional synthetic chemical medicines, thus increasing the probability of providing a more stable revenue stream.

Deal in Focus—Merck and Agensys
Increasingly, pharmaceutical companies are capitalizing on these benefits to drive significant revenue. Wyeth (Collegeville, PA), for example, today relies on biotech product revenues to drive approximately 25% of its revenues. Within the next 5–10 years, the company expects revenues generated from biotech products to grow to 40% of its total revenues. Another compelling factor is that a significant number of blockbuster drugs are now coming off patent. As a result, pharma companies—and increasingly large biotech companies—have expanded their hunt for products to in-license from smaller biotechs. This, in turn, creates significant leverage for emerging biotech companies. The October 2005 deal between Merck (West Point, PA) and Agensys (Santa Monica, CA) is a clear illustration of this trend (See Deal in Focus—Merck and Agensys).


Biotech companies operate in an environment of significant financial constraints. One key obstacle is the ever-increasing amount of cash required to support continued drug development. Most emerging biotechnology companies do not have sufficient capital, research and development capabilities, regulatory expertise, commercial infrastructure, or manufacturing capacity to fully develop and commercialize a product on their own. As a result, collaborative deals with pharma offer biotech companies access to critical resources to fill operational gaps—global sales capabilities, regulatory expertise, R&D depth, and commercial and manufacturing infrastructure.


In the not-too-distant past, biotech product deals were fairly straightforward. A small biotech company with an innovative drug in early stage clinical development turned to a large pharmaceutical company to assume future development and commercialization of the product. These deals were generally structured as exclusive licenses to the pharma partner, in return for an upfront fee, milestone payments, and royalties on product sales.

While the prospect of sharing the costs of late-stage development through product commercialization can be a high-risk proposition for small, financially-strapped biotechnology companies, 50–50 economic structures provide the smaller partner with an opportunity to retain some degree of control over development and to ultimately capture a larger piece of a successfully approved and launched product. Just as important, a 50–50 deal represents a significant statement that the partners have strategic synergies and a shared operating philosophy that will be deployed by both parties to successfully drive product development and commercialization.

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