Today’s advances in life sciences research and development are met with stiff headwinds from a disappointing economy, cost pressures, constricting capital markets, and regulatory developments. Businesses, however, are proving themselves to be resilient in the face of these challenging operating conditions and are rapidly adapting to survive. Not only are companies pursuing novel technologies to address unmet needs, but they are also devising new business strategies designed to deploy resources more creatively, manage exposure to increasing risks, and exploit new opportunities created by legislative change. The following emerging trends serve both to demonstrate these themes and drive activity in our life sciences legal practice.
Out-Licensing by Big Pharma and Big Biotech Companies
Many years of mergers and acquisitions, combined with recent austerity measures, have left Big Pharma and Big Biotech companies with an abundance of development-stage products that are under-resourced due to budgetary constraints or out of synch with current R&D priorities. Accordingly, such companies are increasingly pursuing out-licensing transactions for those products as a strategy to:
• share the costs and uncertainties of the drug development process in an environment fraught with technical and regulatory risk, even for major industry players;
• recoup investment dollars and generate financial returns from the work of licensees that bring a new level of commitment to languishing programs; and
• accelerate drug development by partnering with lean, nimble licensees that can reach decision points faster, while retaining the right to opt back in for later development and commercialization.
While straight out-licensing deals generally take traditional forms, the industry has recently seen significant innovation in transaction structures that provide the licensor with an option to reacquire rights to the product after milestones have been achieved – both through collaborative approaches and change of control arrangements. Typically, the triggers for such options are tied to development goals and de-risking events such that material compensation is payable to the licensee following option exercise in order to reimburse sunk costs, reward success, and share the upside from future commercialization.
Moreover, the mechanisms by which licensors may reacquire rights have evolved with the times. Just as Big Pharma and Big Biotech companies are currently facing many challenges (such as a slow economic recovery, aggressive generic competitors, and healthcare reform, to name a few), the venture capital firms that invest in emerging life sciences companies are struggling to generate returns in turbulent capital markets. Consequently, venture capitalists are seeking alternative exit strategies and finding a new path to liquidity by building businesses from out-licensed programs that can quickly and cost-effectively progress to the point where they have (re)acquisition value to the licensor. Popular techniques include the formation of virtual companies that outsource R&D and basic business functions to lower cost providers, pre-negotiated buy-out provisions (including both call options and put options with respect to products and entire companies), and corporate structures designed to channel option and other contingent payments directly to investors in a tax-efficient manner. In this fashion, out-licensing is being used to bridge the needs of industry and investors by delivering rapid proof of concept in exchange for near-term liquidity.
Options to Purchase
A macro trend having a pervasive effect on the life sciences industry is the shrinking availability of venture capital financing for early and mid-stage biotech companies. This has led many to wonder how this funding void will be filled. Necessity is the mother of invention, and venture capitalists and life sciences companies are working overtime to devise new and creative ways to finance their companies, extend their runway and generate potential exits and liquidity events at a much earlier stage than in the past. One striking example is the recent uptick in option-to-purchase transactions. In the past, options to purchase were sometimes granted by biotech companies to Big Pharma partners in connection with licensing and collaboration deals. The Big Pharma partner usually did not pay a lot of extra money for these options, and most biotech companies in a strong negotiating position resisted granting them because they can have a chilling effect on other potential bidders and licensing partners and it sets a cap on the upside potential the biotech company could generate in a sale.
Recently, however, a growing number of biotech companies and venture capitalists have shed their reservations concerning option deals, and have been actively seeking to grant options to purchase their company to Big Pharma companies on a stand-alone basis, in lieu of entering into a classic licensing and collaboration alliance. These stand-alone option deals come in many shapes and sizes, but as a general rule they call for the Big Pharma company to make a sizable up-front payment in consideration for an option to purchase the biotech company at a pre-determined price at a future date. Sometimes the option price is payable in installments, based on achievement of development milestones. The option payment may serve as the primary means for funding the biotech company’s development programs, or it can supplement financing provided by investors or other sources.
These transactions can be complicated and time consuming to negotiate and document. In order to make the purchase option as legally binding as possible, they often take the form of fully approved and binding acquisition/merger agreements in which the period between signing and closing can last several years, or a warrant to purchase stock coupled with mandatory redemption of outstanding shares. These transactions raise a number of contract drafting challenges and tax, accounting, corporate law and governance, bankruptcy, antitrust and other legal and business issues that need to be creatively addressed to bring these deals to successful conclusion.
Continuing Evolution of Biosimilars
Big Pharma and Big Biotech deals designed to reap the potential revenue from biosimilars took off in 2011 and appear to be continuing. While Big Pharma has been hungry to acquire biotech assets in the last several years as a measure to offset the impending patent cliff, Big Biotech has also demonstrated its willingness to compete for a share of the biosimilars market. Recent deal news certainly highlights the continued interest in biosimilars by Big Pharma and Big Biotech alike. In December 2011, Amgen and Watson announced a deal to collaborate on cancer biosimilars and Baxter and Momenta teamed up to develop six biosimilars. A few months later, Biogen Idec and Samsung established a joint venture to develop and manufacture biosimilars and Amgen announced an exclusive agreement with a contract research organization to conduct phase III biosimilar trials. Most recently, Daiichi Sankyo and Coherus BioSciences announced a partnership to develop biosimilars in certain Asian countries.
How this competitive arena for biosimilars plays out will depend on many factors, not least of which is the regulatory landscape, which is continuing to develop. Indeed, in February 2012, FDA released three draft guidance documents setting forth a proposed framework for the development of biosimilars. The documents focus on questions relating to the key scientific and quality issues that must be addressed to meet the statutory threshold of biosimilarity. One of the key takeaways from the guidance documents is that there is no one-size-fits-all approach for biosimilar development – FDA clearly signaled that it will evaluate biosimilars on a case-by-case basis.
FDA also held a public meeting in May 2012, to obtain input on the draft documents and to solicit input on future policies regarding biosimilars, as a number of open regulatory issues still face the agency and will have a significant impact on biosimilar development. One of those issues is interchangeability, or how a biosimilar will demonstrate that its product can be expected to produce the same clinical result as its reference product in any given patient. Another issue relates to naming of biosimilars – in other words, whether biosimilars and reference products should have the same non-proprietary name or whether the names should be required to be different. FDA must also develop a framework for optimal pharmacovigilance for biosimilars to ensure that there are adequate processes in place to differentiate adverse events associated with biosimilars from those associated with reference products. As FDA continues to grapple with these issues, biosimilar stakeholders are sure to weigh in.