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Wyeth today relies on biotech product revenue to drive approximately 25% of its revenues.
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.
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).
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.
The deal flow in recent years demonstrates an increasing trend away from the royalty model toward 50–50 shared economics, with the smaller company actively participating in the project and retaining equal control over critical development decisions, including determining where clinical trials will be conducted, deciding who will provide the clinical supply material, and who will take the lead in interacting with the regulatory agencies in the US, Europe, and other major markets.
If a copromotion arrangement (usually in the US market) is added to the mix, then the deal becomes more complex, but also more exciting for the emerging biotechnology company. In a copromotion agreement, the small biotech company can bargain for the right to participate in the marketing and promotion of its drug product in the largest pharmaceutical market in the world—the US market.
Fifty-fifty codevelopment arrangements or copromotion deals represent attractive options for smaller companies who want to control their product's destiny. However, these types of deal structures are much more complex than those based on the larger pharma partner taking full responsibility for product development and commercialization. Consequently, these evenly split collaboration agreements require extensive planning and detailed negotiations.
Companies considering such a partnership or alliance with pharma or biopharma must consider a number of critical factors, including:
Can the smaller company afford a 50–50 cost sharing arrangement? This type of structure means, not only sharing product revenues, but also the expenses, which can be considerable. Companies contemplating shared development cost arrangements must do their financial homework in the form of cost models, a risk-adjusted net present value analysis, and a detailed cash flow forecast. At each step of the analysis, be sure to identify the assumptions embedded in the financial forecasting. Remember that each assumption about the product's development path, launch time, and commercial market potential will be tested by the larger pharma partner during its due diligence.
As part of the analysis, companies should consider the size of the market opportunity, potential market share over time as well as development, marketing, and other commercialization costs. Product pricing and pay or reimbursement issues should also be factored into the analysis. Finally, the analysis should incorporate realistic development, approval, launch, and peak sales time lines. Of course, the competitive environment, and its potential impact on these time lines, also should be included in the analysis.
The long-term nature of life sciences collaborations and strategic alliances makes these arrangements inherently unpredictable. It is important then to consider multiple scenarios when completing the financial analysis. The small biotech company should perform a sensitivity analysis varying the ramp-up period, market share attainment, and cost scenarios. Biotech companies also need to carefully consider the timing of cash inflows and outflows because cash availability often is the most significant limiting factor.
In a copromotion deal, negotiations will need to cover, among other things, financial issues such as allocation of promotional costs and expenses, number and quality of detailing, responsibility for sales force training, and monitoring and auditing of promotion expenses. Historically, biotech companies have wanted to play a key role in promoting and marketing products to learn from the process and to build their own commercial infrastructure. But a key question that biotech companies should ask before making any decision is, "Do we know what we're getting into?" It is easy to underestimate the cost and resource requirements associated with a copromotion structure. Building a sales force and a marketing team, and establishing the brand for the product can cost a company millions of dollars—before any product sales revenue is ever recorded.
The PDL BioPharma (Fremont, CA)/Roche (Basel, Switzerland) global asthma collaboration is an example of a biotech or pharma deal that includes both a 50–50 shared economic structure and a copromotion arrangement. This deal amply illustrates the complexities that a biotech company must address to successfully negotiate and execute such deals.
PDL's relationship with Roche dates back to 1989, when it licensed to Roche worldwide rights for Zenapax, the first humanized monoclonal antibody approved by the FDA for the treatment of acute kidney transplant rejection. Over the years, PDL continued to conduct investigator-sponsored trials to test Zenapax's potential in autoimmune diseases and asthma applications. In 2003, PDL paid $80 million to Roche to buy back the rights to Zenapax, except for use in kidney transplant patients. Following the announcement of positive Phase 2 data in asthma, PDL approached Roche to negotiate a collaborative deal for Zenapax use in asthma and other respiratory disorders. Key features in the asthma collaboration include equal representation and decision-making on development and commercialization decisions, a 50–50 cost-profit split, and a copromotion arrangement in the US. Prior to agreeing to the deal with Roche, PDL committed substantial resources to the diligence process, with a focus on: the potential product market share in asthma; the need to track sales in multiple indications, including transplant, asthma, and multiple sclerosis; development costs and risks, including the costs of developing a new high yield antibody manufacturing process; estimated approval and launch dates; and post-launch marketing and promotion costs.
In today's deal environment, biotech companies find that it is possible to obtain development funding from a larger partner without ceding control. An illustration of this is the 2005 deal between Theravance Inc. (South San Francisco, CA)/Astellas Pharma (Tokyo, Japan). Astellas agreed to pay $65 million upfront and another $136 million in milestone payments based on clinical filings and approvals for the Theravance Phase 3 antibiotic Telavancin. Theravance successfully retained significant control over the clinical development and launch of this antibiotic.
As with a copromotion arrangement, successful negotiation of balanced development terms requires a substantial amount of strategic thinking and planning, along with detailed financial analysis. Some key considerations that must be assessed in a co-development deal include determining how and where clinical studies will be conducted, and which party will assume oversight responsibility over the trials. Responsibility for development expenses and internal FTE rates and costs also must be discussed in detail, and agreed on. A "meeting of the minds" on these key issues, generally through a negotiated development plan and budget, will solve a lot of potential problems down the road.
Whether collaboration will be successful depends a great deal on the often unpredictable component of human capital. Therefore, it is important to consider the following before entering into a long-term collaboration:
As with any other key business decisions, various scenarios and strategies should be thoroughly evaluated. In particular, biotech companies should consider the potential downside of a 50–50 collaboration with pharma or biopharma. While sharing the risks and costs can be attractive, it comes at a price. Virtually any significant collaboration means that the smaller biotech company will give up certain rights to the drug candidate and the related technology as well as relinquish significant management control. Sharing the "upside" can also be emotionally difficult for a company and its team when early sweat equity and risk-taking went into building the company and the product.
Finally, when considering any long-term partnering arrangement, companies need to have extensive internal discussions to address a number of key questions:
Thorough advance preparation results in better deal-making and avoids unexpected surprises during the negotiation process.
When considering a 50–50 profit and cost share arrangement, or a co-promotion deal, a company should keep in mind alternative structures and scenarios, including the following, to maximize long-term flexibility:
Partnering can be a win–win situation for both pharma and biotech. Pharma can increase its pipeline and manage its risk, while biotech may obtain much needed cash and developmental and commercial expertise. Pharma's desire to access earlier stage products provides leverage for biotech companies to negotiate more balanced partnering terms. Specifically, this leverage allows biotech to retain more control over the continued development, and ultimately, the commercialization phase, of the product, which has been a long-term goal. However, the 50–50 shared development structure deal is one that a biotech company needs to approach cautiously. Similarly, a copromotion arrangement requires a significant amount of cash and resource attention—companies can easily underestimate what is required.
Partnering deal negotiations can be highly complex, extremely lengthy and resource intensive. Companies considering partnering arrangements must do financial and operational due diligence to ensure the success of the partnership, which includes creating a detailed financial model that incorporates variable scenarios, risk-adjusted net present value calculations, and cash flow forecasts. The senior management team and subject matter experts should be consulted at critical points in the planning and negotiation process to assist in evaluating critical strategic questions and determining the best partnering approach. The key is to find the optimal path forward for continued development and, ultimately, commercialization of the company's drug compound—with a successful partnership as the means to achieve this end.
Sergio Garcia is cochair of the life sciences group, and partner, corporate and intellectual property group, at Fenwick & West LLP, Embarcadero Center West, 275 Battery St., San Francisco, CA 94111, Tel 415.875.2366, Fax 415.281.1350, firstname.lastname@example.org
1. BIOWORLD Today, October 18, 2005; Agensys, Merck Ink Potential $170M Cancer Antibody Deal.
2. Biotech 2005—Life Sciences: A Move Towards Predictability; Burrill & Company Report 2005.
3. BIOWORLD Today, November 9, 2005; Theravance Gets Telavancin Partner in Deal Worth $221M.
4. PRNewswire -FirstCall, September 30, 2005, Roche and Protein Design Labs Restructure Commercial Alliance on Zenapax.