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Australasian Biotechnology, CONFERENCE PAPER Biopartnering - An illustration Mitzi Gilligan, Minter Ellison Code Number:AU98014 The aim of this article is to provide a general outline of some of the commercial and legal issues
which must be considered when negotiating a biopartnering deal. I have chosen to focus on a
biopartnering deal between a biotechnology company and a larger (and possibly international)
pharmaceutical company. The article therefore mainly considers the issues surrounding
biopartnering in human therapeutics where both parties are corporate entities. Whilst some
different factors will apply in relation to other types of biopartnering, for example, where one of
the parties is an academic or charitable research organisation, or the field is not human
therapeutics, many of the general issues will remain the same. In order to make this article more
digestible, I have chosen the format of an imaginary letter to me by a fictional client which I call
"Cureall Biotech". The letter requests some advice on a proposed biopartnering deal and my
response outlines the issues to be considered. Letter from Cureall Biotech Dear Mitzi As you know a number of people from Bigpharma PLC will visit us next month. The purpose of the visit will be for them to inspect our facilities here in Melbourne, to hear a number of presentations from our scientists on our technology and to participate in some meetings discussing a possible future relationship between us. I am pleased to say that the initial indications from Bigpharma are most encouraging and they have expressed an interest in entering into a closer collaborative relationship in relation to our Project X technology. We have talked through with Bigpharma some general concepts which could govern our relationship and have come up with a number of commercial points of agreement. They have now asked us to be prepared to negotiate a draft heads of agreement when they visit us. I have set out below the main proposals they have put to us and would like some initial advice from you as to how these issues should be handled and what other issues we need to consider. If you could let me have an idea of the items which we will need to include in the heads of agreement I will make sure we give some thought to those issues prior to meeting with you to give detailed instructions for the drafting of a heads of agreement to present to Bigpharma next month. Bigpharma wish to contribute some funding to our research and development program for the Project X technology. They are particularly interested in developing products in the diabetes and arthritis indications. They will not take a lead role in the research and early development stages but will give us access to their screens and animal models. Once lead products have been identified they will wish to assume the main responsibility for phase I to III clinical trials, registration and marketing and sales of any products worldwide. Our concern in relation to the financial is very much to strike a balance between immediate injections of cash to fund both this and our other projects, and our long-term aim of participating as much as possible in the benefits of having our products in the markets. We would like to discuss with you at our meeting alternative structures for payments and gain an understanding from you of what amounts might be appropriate in light of other similar deals you have seen. We expect to establish some form of project management committee with Bigpharma and would also like to consider retaining co-marketing rights for Australia and the pacific rim countries. We are concerned about who bears the costs associated with pursuing our patent applications for the Project X technology in the key markets. As you know, the Project X technology has potential application outside the indications in which Bigpharma are interested. We do not wish to lock ourselves out of potential collaborations with other organisations on the Project X technology where these collaborations do not involve the indications chosen by Bigpharma. My letter in response Dear George Thank you for your letter regarding the proposed collaboration with Bigpharma. I have set out below some initial issues you need to consider prior to our meeting next week. There are of course many other points which will need covering in a full agreement. 1. MONEY 1.1 Upfront and Milestone Payments The table below is an example of a payment structure for this kind of deal. We will need to consider very carefully the actual milestones and amounts you wish to put to Bigpharma and I can provide you with some examples to help in this.
1.2 Research Costs You will need to think about the method of calculating the costs to be reimbursed to you for research expenses. Will this just be in relation to out-of-pocket expenses or will it include a labour component? Will you be invoicing Bigpharma and if so, how often? Will Bigpharma's approval be required for budgets? What percentages of your costs do you expect Bigpharma to bear? Considerations include whether the research is relevant only to the field of the collaboration, and the level of input/control they have over this stage. 1.3 Royalties It will not be sufficient to leave the royalty rate to be determined once you have product registration. If you do not have sufficient certainty of key contractual terms, a contract is not enforceable. The royalty rate is obviously a key contractual term. The alternatives are to either try to agree a royalty rate now or to agree that if the parties cannot finalise a royalty rate at the relevant time the decision will be referred to an independent expert for final decision. There are some mechanisms which can be used to try to calculate an appropriate royalty rate using forecasts of profitability and we can discuss these at our meeting. However, there are disadvantages in locking into a royalty rate now when neither the cost of getting the product to market, nor the cost of manufacturing and selling once it has been approved, are known. Similarly, it is difficult to predict the price and profit level at which the product will be able to be sold. If you decide to delay this issue you will need to set out in your contract the factors which the independent expert must take into account when determining the royalty rate. The actual percentage rate is only one factor of structuring royalties. A decision will need to be made regarding the price on which the royalty will be calculated (eg. the price of sale by Bigpharma to distributors or the price to the end-user). You will also need to consider what may be deducted from that price before the royalty is calculated, such as transport, packaging and insurance costs, and possibly some development cost recoupment by Bigpharma. Other issues include the handling of product bundling and discounting, sliding scale royalty rates based on sales volumes, minimum royalties and factoring in profit on manufacture by yourselves. 2. PROJECT MANAGEMENT AND ALLOCATION OF RESPONSIBILITIES The contract will need to link to the research and development plans and set out a project management structure (usually in the form of committees). The crucial issue is who has the right to control each phase. 3. SUPPLY OF PRODUCT 3.1 You will need to decide who is responsible for the supply of product for clinical trials and who bears the cost of manufacture. 3.2 You did not mention in your letter whether you are intending as a business to move towards large scale manufacture of your products. If this forms part of your long term business plan you will need to indicate in the contract that you wished to reserve the right to manufacture product for commercial sale. 3.3 The risk of claims for death or personal injury resulting from clinical trials and commercial sale will need to be allocated between the parties. You will also need to ensure appropriate product liability insurance is put in place. 4. INTELLECTUAL PROPERTY 4.1 Your agreement needs to deal with ownership and licensing of the existing IP of each party (often called background) and the new IP created by the Project. As the Project X technology is of wider application than the areas in which Bigpharma is interested, an assignment of your intellectual property rights to Bigpharma will not be appropriate. You will be entering into a licence agreement with Bigpharma granting it the rights it needs to participate in the research program, run the development program, manufacture, market and sell the products. You may also need a licence to use their background IP. Bigpharma will be seeking exclusivity and this is not unreasonable in light of the significant payments to be made. However, you will need to be careful to specify the field within which exclusivity applies as precisely as possible by reference to indication. You will also need to state if there are to be any territories in which their rights will not be exclusive, such as countries in which you wish to have co-marketing or copromotion rights. 4.2 As you are aware it is expensive to obtain patent protection for your technology in all the key markets for Project X products. I understand that you already have a number of PCT applications for the Project X technology but have not yet come to the stage where you need to specify which countries in which you wish to proceed. The major expenditure will occur when you need to have the applications translated into host languages. If all the Project X technology was exclusively licensed to Bigpharma it would not be unreasonable to expect it to bear the expense of worldwide patenting. However, Project X technology is broader than the aspects which will be licensed to Bigpharma and many of the patents will be broader than required by Bigpharma to protect its markets. You can probably only expect Bigpharma to contribute a proportion of these costs. If it is possible at a future stage to apply for specific use patents which relate solely to Bigpharma's rights then that can be done at the expense of Bigpharma. 4.3 Who is to be responsible for the handling of actions against infringers of your intellectual property? Who must handle claims by third parties that use of the Project X technology infringes their intellectual property? The provisions in a biopartnering agreement dealing with the allocation of this responsibility and the associated costs can be quite complex. 5. TERMINATION 5.1 What term of licence will be offered and in what circumstances will you wish to have the right to terminate Bigpharma's licence. A term equivalent to patent life is common. Many major collaborators believe that the large risk they assume in relation to the very substantial costs of late stage development of products means that the licensor should not have the right to terminate their licence in any circumstances after product registration. However, I believe it is important you retain the right to terminate the licence in instances of serious and repeated breaches and in particular, in the event of insolvency or a failure to pay the royalties. 5.2 It is possible that Bigpharma will seek the right to choose to terminate the agreement at certain points. It is not unusual to allow a right for termination at completion of the research program, particularly if no lead product candidates can be identified. The costs associated with the development program may mean Bigpharma will wish to have the right to terminate at given points during that program. I would not suggest you include this right in your first draft heads of agreement but if this is requested it is not necessarily in your interests to refuse because a reluctant collaborator is not generally helpful to companies in your position. 5.3 It is important to provide in the contract that all announcements relating to the relationship, including announcements relating to results of the development program or termination of the relationship must be approved by both parties before they can be issued. The shares in biotech companies are so volatile that a badly timed or mishandled announcement can have a severe impact on the market value of the company. 6. GENERAL POINTS 6.1 Negotiation of biopartnering deals with large pharmaceutical companies can be a very time consuming and labourious process. Many smaller companies find it difficult to understand the internal procedures which must be gone through within their larger counterparts in order to get a deal like this approved. Do not be discouraged if the responses of Bigpharma take time or the negotiation of the full contract does not progress as quickly as you would like. 6.2 As you are probably aware, Bigpharma already has a number of lead candidates in its pipeline for diabetes and arthritis. Project X technology represents a serious competitive threat to those products and I am slightly concerned that Bigpharma's motives may be more to protect the market for their own product than to promote yours. We will therefore need to build careful performance level requirements into the contract to ensure Bigpharma cannot just sit on your product in order to protect its own. 6.3 You must conduct all your discussions with Bigpharma under your standard mutual disclosure confidentiality agreement. If you give Bigpharma access to any of your materials this must be done under your standard form materials evaluation agreement. 6.4 This deal will be an extremely important milestone in the development of Cureall. It will form one of the cornerstones for your next round of financing and your planned IPO. At each of these stages you will have to make full disclosure of the material aspects of the contract and it is important that we get these right from the outset rather than having to seek to renegotiate at a crucial stage of a financing. Please let me know if you have any queries. I will look forward to seeing you next week. Yours sincerely Mitzi Gilligan Mitzi Gilligan is a senior associate with Minter Ellison Lawyers in Melbourne. She returned to Melbourne last year after 6 years of study and work in England. Whilst working in London and Cambridge she specialised in providing commercial legal advice to the biotechnology and pharmaceuticals industry. Mitzi can be contacted on 03 9229 2000 or mmlg@minters.com.au. © Minter Ellison 1998 Copyright 1998 Australian Biotechnology Association Ltd. |
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