Partner Selection

Just as biotech management teams need to sell their story to prospective investors, as discussed in Chapter 2, it is also necessary to begin building awareness and trust by cultivating relationships with larger biopharma companies that might be future alliance partners well in advance of a particular transaction. These larger companies also have an interest in being seen as the preferred partner in a highly competitive deal environment. Fortunately, from the perspective of an emerging biotech company, all large pharmaceutical and commercial-stage biotech companies have large business development teams whose primary mission is to scout for new technologies and promising product candidates for acquisition and alliance. It is relatively easy to meet these teams at industry events (including a multitude of events that are focused on alliances) and many pharmaceutical companies provide online data regarding their teams and areas of interest [11].

Cultivating relationships beyond the business development team directly with relevant members of the R & D organization through scientific societies and meetings can also be important. This is all the more important the earlier a product is in its development (e.g., prior to proof of concept testing). While the business development team is responsible for deal sourcing and execution, a biotech company's relationship with, and support from, R & D leadership is essential to close a deal and to maximize its value following close.

Once a company has defined the strategic rationale behind a specific alliance transaction, it must further refine the list of potential partners. While much will have been learned from earlier relationship building, the key attributes to be evaluated in partner selection include the following:

• Complementary (or potentially competitive) assets or expertise
• Uniqueness of the partner's assets/attributes
• Degree of strategic alignment
• Exclusivity (inability to acquire or replicate the partner's assets)
• Cultural compatibility
• Prior alliance experience and outcomes

Once this evaluation is complete, the company can assess interest in pursuing a formal relationship based on a prioritized list of potential partners.

Mission and Objectives

For all the participants, alliances pose complex challenges. To be successful, there must be a meeting of the minds that crystallizes the need for the deal and also drives the structure of the transaction. Typically, the signing of a strategic alliance is preceded by many months of discussions and due diligence (by both parties) that encompasses the scientific, financial, and cultural elements of the transaction. A term sheet outlining the general conditions of the arrangement may be circulated fairly early in the process as a basis for continuing discussions. However, prior to defining detailed contractual terms and obligations, it is critical that the partners define the objectives of the alliance inasmuch as such discussions set the framework for the negotiations and the eventual management of the partnership. Indeed, the partners must jointly agree on how they will define success throughout the course of the relationship and where in the relationship they expect to create value. Jumping directly into negotiating a transaction without full agreement on the overall objectives can lead to a lack of flexibility and disagreements down the line as development plans inevitably require alteration.

Structure

The strategic rationale behind the transaction will drive its structure. Figure 3-6 depicts the range of common collaboration structures, from highly informal through to an acquisition, and the key attributes of each. While biopharma companies may have formal or informal alliances with academic institutions and participate in industry consortia to create common standards or address common underlying technological issues, the vast majority of traditional alliance transactions fall under the contractual license category. Such transactions may also include a minority investment; however, it is rare (outside of the context of corporate venture capital described in Chapter 2) for a pharma company to make a minority investment in a biotech company in the absence of a larger strategic relationship. Similarly, formal legal entity joint ventures (JVs) are also relatively uncommon between pharma and biotech partners, although pharma–pharma JVs have been used in certain circumstances. For example, in 2009, Pfizer and GSK launched a JV (ViiV) to combine their respective HIV franchises and product pipelines to enhance scale and competitiveness, and various pharmas have entered into JVs with local companies to extend their reach in emerging markets. In general, however, JVs that include a formal legal entity are frequently too cumbersome and difficult to exit, and they typically require the commitment of additional capital and human resources as compared to a contractual alliance.

The most common pharma-biotech alliance—a license and development arrangement—is typically structured as a license to a product candidate or candidates, in exchange for an upfront license payment, the right to receive additional payments upon the achievement of predefined milestones (development, clinical, and commercial), and downstream royalty payments on any eventual sales by the pharmaceutical company of the licensed product(s). In addition, the pharmaceutical company may agree to reimburse the biotech company for its continuing research effort based on an agreed-upon budget.

Alliance transactions are frequently announced as multi-billion dollar transactions, while, in reality, the upfront license payments frequently represent the only guaranteed payments in the arrangement (Figure 3-7).

The licensor (typically the biotech company) can license worldwide rights to its product, or only selected territories. In the early years of the biotech industry, out-licensing worldwide rights to a product was common. As biotechs have gained experience and the balance of negotiating power has shifted, it has become common in recent years for biotech companies to retain the US market (the world's largest and most profitable market for drugs), while licensing the rest of the world rights. Even if the decision is made to out-license a product candidate on a worldwide basis, biotech companies can retain co-promotion rights in certain territories, which provides the option to participate in the commercialization of the product (thereby building internal sales and marketing capabilities) in exchange for enhanced returns. Biotech companies can also pursue a strategy of licensing to several partners on a market-by-market basis, for example, North America, Europe, Japan, and other Asia-Pacific countries. This approach has several disadvantages, including the need to coordinate with multiple partners. Further, such an approach is likely to only attract regional partners and not large multinational pharma companies with globally consistent capabilities and scale.

The structure of the alliance will also be influenced by the nature of the product being developed, for example, a primary care product that requires a significant sales force as compared to a therapeutic treating a targeted or orphan indication where specialist physicians and patients could be covered by a smaller, targeted sales force. An early stage biotech is more likely to fully out-license a primary care product because it would be difficult and possibly prohibitively costly to build its own sales force and medical affairs function. On the other hand, an orphan or highly specialized drug may be best commercialized by a biotech company with an intimate knowledge of the key opinion leaders, patient advocacy organizations, and even individual patients (through clinical trial registries). This was the path pioneered by Genzyme to great success with its enzyme replacement therapies for Gaucher disease and Fabry disease.

A common variation of alliance is the platform technology alliance, which is applicable when the biotech company has a broad drug development technology (or platform) that is expected to generate multiple drug candidates in one or more therapeutic areas. In these arrangements, the partner in the transaction may negotiate for a license to specified number of future drug candidates to be discovered and/or developed by the biotech company. The upfront payment in these arrangements is structured either as a license or an option to license a future product and is used to fund the discovery of the product candidates.

A less common option-based structure—and one that is practically only available to pre-IPO companies—provides the pharma company with the right to acquire the entire biotech company at a predefined price upon the occurrence of certain triggering events (typically a clinical trial result). Examples include Novartis' transaction with Proteon Therapeutics [12] and Genentech's option to acquire Constellation Pharmaceuticals, which expired unexercised in 2015 [13]. Deals of this type are practically only available to pre-IPO companies because the option to sell is technically granted by the shareholders of the company and it would be very challenging to get the dispersed shareholders of a public company to agree to such an arrangement (although there have been notable exceptions, including the Roche-Genentech transaction described below). Further, the option price would put an effective cap on the valuation of the company, which may be reasonable for a venture capitalist looking for a predictable exit but less so for a public investor with multiple entities into which it can invest (with no capped upside). Venture capitalists seeking to increase the predictability of their own investment exits have also adopted “build to sell” structures in which the pharma company acquirer and the acquisition price are known at the founding of the company. Sanofi's deal with Warp Drive Bio and venture capitalists Third Rock Ventures is an example of such a structure [14].

Arguably the most successful relationship ever formed in the biopharma industry, in terms of drugs produced and value created, was Roche's long-standing arrangement with Genentech that originated in 1990 and concluded with Roche's 2009 acquisition of Genentech. Roche initially acquired a controlling interest in Genentech and an option for Roche to acquire the remaining shares of Genentech [15]. The agreement was modified over time to extend the option and provide Genentech shareholders the right to “put” their shares to Roche should Roche not exercise its option [16]. For the period when this arrangement was outstanding, the company's stock traded within a narrow range. Roche eventually exercised the option and immediately sold a significant portion of the shares in a public offering, realizing a significant gain. More critically, this “big sibling” relationship effectively insulated Genentech from the short-term pressures and volatility of the capital markets during a critical period of its development, while allowing it to retain its decision-making autonomy, culture, and employee incentives.

It is somewhat surprising that this structure has not been emulated more frequently, however, it does require a long-term view and willingness to assume more risk than a typical alliance. More recent examples of this genre of transaction include Sanofi's relationship with Regeneron (see text box, “Sanofi-Regeneron: A Valued Relationship”), which began as a more typical alliance transaction in 2003 but expanded over time. Purdue Pharmaceutical's oncology-focused alliance with Infinity Pharmaceuticals [17] (which has since terminated) and the 2014 alliance between Sanofi Genzyme and Alnylam Pharmaceuticals [18] are additional variations on this approach. Each of these transactions included the purchase of a significant (but not a controlling) equity stake (with no option to acquire the balance of the company). Similar to Roche-Genentech, these alliances have provided each biotech company with financial resources and a long-term development and commercialization partner for multiple identified and future product candidates. Roche also recently applied this structure to acquire a controlling interest in Foundation Medicine, which does not develop drugs itself but rather provides data-driven insights regarding possible cancer treatment combinations and regimens based on the genetic profile of a tumor. In addition to an ownership stake, Roche also provides R & D funding for additional genomic profile tests and will utilize Foundation's database to standardize clinical trial testing. This aspect of the relationship is designed to enable comparability of clinical trial results for R & D purposes and ultimately in the clinic [19].

Key Deal Terms

Regardless of the structure being deployed, certain key areas of understanding must be negotiated and included in the alliance contract. These terms include:

• Scope: The technology, products, therapeutic areas, and territories covered by the alliance.
• Responsibilities: Defining which parties are responsible for research, development (including the design and performance of clinical trials), manufacturing, and commercialization. It is not uncommon for alliance partners to share responsibility (and costs) in areas such as clinical development and commercialization. Given the differences in scale and resources, a biotech company is typically more dependent on an alliance for its success than a large pharma company partner. Therefore, it is important that the agreement include a diligence provision requiring that the pharma company use all commercially reasonable efforts to purse its responsibilities.
• Financial terms: The consideration, both fixed and contingent, that will be paid by the licensing partner. Fixed payments typically include an upfront license or option fee and reimbursement of R & D costs at specified rates per employee or based on a negotiated budget. Contingent payments typically include amounts due upon successful completion of R & D milestones (e.g., identification of a product candidate or successful completion of a clinical trial), regulatory milestones (approval to market in a particular market), and commercial milestones (reaching specified levels of sales in a market), as well as sales-based royalties. The arrangement may also include a simultaneous purchase of equity at a negotiated price.
• Intellectual property: Defining the rights to preexisting intellectual property as well as that created as a result of the alliance. It is common for the licensee to receive all rights to develop and market the licensed product, while the licensor receives rights to any underlying improvement in the core platform technology that led to the product under development.
• Exclusivity: Defining the extent that the parties may work on competing products (alone or with other organizations) in same therapeutic area or with same mechanism of action during the collaboration term.
• Governance and dispute resolution: Defining the mechanisms by which the alliance will be governed and the means to settle any disputes that arise. Most alliances are governed by a joint steering committee (JSC) comprised of two to three representatives from each party. The JSC may also be supported by joint development and commercialization committees. The responsibility of the JSC is to develop and oversee business plans for the alliance, including key milestones and budgets, and to make operational decisions after appropriate review of the facts (e.g., the size and design of a clinical trial). In the event the JSC reaches a stalemate, decisions are escalated to members of senior management for discussion. Ultimately, it is common for one party (usually the licensee) to have ultimate decision making authority.
• Term and termination: Defining the term of the arrangement and the rights of each party to early termination, including on change of control of either partner or through breach of a material provision of the agreement. The duration of an alliance is commonly defined as the term of the last-to-expire patent covered by the license. However, an alliance may have a shorter, defined term. Typically, an alliance may be terminated with three to six months of notice by the licensor, whereas the licensee may only terminate because of an uncured breach of contract by the licensor. The dispensation of the underlying products or technology upon termination is also specified. If the licensee (pharma) terminates the arrangement, the technology and all improvements usually revert to the licensor (biotech) company.

Relationships Matter

The language in the contractual arrangement between the parties should clearly spell out responsibilities of the parties and define what happens when there is a dispute. The JSC should build a detailed alliance plan that defines budgets, milestones, timelines, and the project-level division of responsibilities. However, JSCs typically only meet two to four times per year. The success of any alliance, beyond the technical results of the R & D, is based on the quality of the relationship between the partners at multiple levels. Thus, it is important that leadership on both sides be committed to the alliance and that regular communication occurs between formal meetings and issues or questions are addressed timely. Larger companies frequently have alliance management offices that are charged with monitoring the progress of the relationship. On the biotech side, in addition to functionally oriented project managers, management should consider having an alliance manager in charge. The alliance manager should have a different skill set that is tuned to the long-term objectives of the alliance and the strategy needed to obtain them [20].

Monitoring Results and Learning

Because of the strategic importance of alliances in the biopharma industry, companies will likely enter into multiple transactions with various partners. While each transaction will likely have unique attributes, it is important for all companies to establish processes to monitor both individual alliances against expectations (done through the alliance manager and the JSC structure described above) as well as the success of the overall alliance process (Figure 3-8). Measures should be as objective and quantifiable as possible and be both internal and external (if obtainable at a reasonable cost). Knowledge gained from this analysis should be applied to new transactions.