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Licensing

Early Stage and Discovery Deals

Strategy, Structure and Payment Terms 2nd Edition

Publication Date   January 2007
Publisher   Pharmalicensing
Product Type   Report
Pages   142
ISBN Number   1-905310-23-4
Product Code   PHM001
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Summary


Dealmaking in the pharmaceutical and biotechnological industries covers a wide variety of agreements between individuals, companies and institutions from simple late-stage product acquisitions (deals relating to products in clinical development, approval, launch and marketing) through to complex discovery and target research and development deals.

Dealmaking has existed since the beginnings of the industry, since the advent of proprietary medications, patents and latter emergence of biotechnology entrepreneurs. The extent of dealmaking and alliances has grown continually from the 1970s, and has accelerated rapidly with the onset of biotechnology and the need of larger pharmaceutical companies to enhance their development pipelines.

The number of partnerships between pharmaceutical and biotechnology companies increased between 1995 and 2000 (Wallis and Heybroek, 2003), and alliances between biotechnology companies rose from 728 in 2000 to 745 in 2001 (Jaffe, 2002).

Increases in dealmaking are due in part to:

  • increasing number of emerging biotechnology and drug discovery companies producing drug concepts but without the resources to:
    • take products through a full development program
    • market products internationally
  • increasing interest in commercialization of innovations from universities and scientific institutions
  • biotech investor demand for evidence of continued growth and endorsement of technologies by experienced pharmaceutical companies
  • increasing cost of developing a drug to market
  • according to a 2003 report from Tufts University (USA), it costs US$897 million to bring a drug to market (this has increased from US$802 million in 2001)
  • low probability (less than 10%) that a drug entering clinical trials will be successful
  • impending patent expiry of blockbuster drugs requiring new formulation and drug delivery formats
  • consequent deficit in big pharma pipelines requiring in-licensing of products according to a wide variety of sources
  • large companies now depend on alliances for 25-60% of their pipelines.

As well as growing, the field of dealmaking in pharmaceuticals is also changing. Many pundits have declared the death of the straightforward arms-length licensing deal, and the growth of partnering as the 'new licensing'. These new, more 'intimate' partnerships have advantages in allowing the licensor to retain more rights and control over product development, but increase the complexity of the deal.

This report addresses late-stage dealmaking (deals relating to products in clinical development, approval, launch and marketing) in terms of strategy, structure and in particular financing. The report reviews the payment structures of late-stage dealmaking, providing benchmark figures for all parts of deals, along with case studies and examples of full deal contracts.

Content


  • 1. Introduction
  • 2. What are the benefits of early-stage partnering?
    • 2.1. The role of partnering in corporate strategy
      • 2.1.1. What are the benefits of out-licensing?
      • 2.1.2. In-licensing: A way of giving an off-patent drug a new life
    • 2.2. The revenue from in-licensed products is predicted to have an annual growth rate of 10%
    • 2.3. Partnering for pipeline development
      • 2.3.1 One company’s tactics: GlaxoSmithKline’s approach to in-licensing
  • 3. The evolving role of partnering in the biotech and pharma industries
    • 3.1. Licensing to partnering
    • 3.2. The traditional licensing model
    • 3.3. The transition from straight-forward transactional exchanges to complex partnering agreements
    • 3.4. Who benefits from the risk and reward sharing?
    • 3.5. Sharing knowledge is a big part of the deal structure
    • 3.6. What does the partnering model teach us?
    • 3.7. Complex partnering models
      • 3.7.1. Process
      • 3.7.2. How to structure a successful deal
      • 3.7.3. Financing – What aspects should be considered?
    • 3.8. A shift in early stage dealmaking
      • 3.8.1. Biotechs competing with pharma for deals
  • 4. Early-stage deal strategies and structures
    • 4.1 Successful out-licensing
    • 4.2. When do companies partner?
      • 4.2.1. Who benefits from early stage licensing?
      • 4.2.2. License late: A safer but more costly avenue for the licensee
    • 4.3. Early and late-stage deals - a cost comparison
      • 4.3.1. What do companies spend on partnering and how successful are the in-licensed projects?
      • 4.4.1. Alliances between biotechnology companies are taking over
      • Case study 4.1 – MedImmune / Infinity Pharmaceuticals
      • Case study 4.2 – PTC Therapeutics / CV Therapeutics
      • Case study 4.3 – Predix Pharmaceuticals / Amgen Inc
      • Case study 4.4 – Medtronic / RVX Therapeutics
      • Case study 4.5 – Enzon Pharmaceuticals / Santaris Pharma
      • 4.4.2. Upfront payment: An important part of the deal structure
      • See case study 4.1 – MedImmune / Infinity Pharmaceuticals
      • Case study 4.6 – GlaxoSmithKline / ChemoCentryx
      • Case study 4.7 – Infinity Pharmaceuticals / Novartis
      • 4.4.3. Why is University out-licensing associated with very early-stage projects?
      • Case study 4.8 – National Institutes of Health (NIH) / Regeneron
      • Case study 4.9 – GlaxoSmithKline / Alimentary Pharmabiotic Centre
      • Case study 4.10 – Biota / NIAID
      • Case study 4.11 – Cystic Fibrosis Foundation / Vertex Pharmaceuticals
    • 4.5. Licensing strategy case studies
      • Case study 4.12 – Crucell / Immunobiological Laboratories Co Ltd
      • Case study 4.13 – Galapagos / Cellzome
      • Case study 4.14 – Memory Pharmaceuticals
      • Case study 4.15 – Caprion Pharmaceuticals / Boehringer Ingelheim
      • Case study 4.16 – Cambridge Antibody Technology / AstraZeneca
      • Case study 4.17 – Biorigen / New Life Scientific
      • Case study 4.18 – GTC Biotherapeutics / LFB Biotechnologies
    • 4.6. Deal types
  • 5. Payment strategies
    • 5.1. Deciding a strategy
    • 5.2. Payment options
      • 5.2.1. Upfront payments
        • 5.2.1.1. Conditionality of upfront payments
      • 5.3.2. Loans
      • 5.3.3. Convertible loans
      • 5.3.4. Equity
      • 5.3.5. R&D funding
      • 5.3.6. Annual fixed payments
      • 5.3.7. Milestone payments
      • 5.3.8. Innovative forms of payment - ‘quids’
        • 5.3.8.1. Products
        • 5.3.8.2. Extended rights to pipeline/technology
        • 5.3.8.3. Benefit from skills transfer
        • 5.3.8.4. Public relations – An important factor for the early-stage company
        • 5.3.8.5. Other quids
      • 5.3.9. Royalties
        • 5.3.9.1. Issues affecting royalty rates
        • 5.3.9.2 Royalties on combination products
      • Case study 5.1 - Elan Corporation plc / Abbott Pharmaceutical PR Ltd
        • 5.3.9.3. Guaranteed minimum/maximum annual payments
        • 5.3.9.4. Royalty stacking
        • 5.3.9.5. Royalties and supply/purchase contracts
      • 5.3.10. Option payments
  • 6. How to make the right deal
    • 6.1. Constructing the deal
    • 6.2. Finding the right partner
      • 6.2.1. What attracts a partner?
      • 6.2.2. Where to look for a partner
      • 6.2.3. Sources of information
      • 6.2.4. Building a network
        • 6.2.4.1. Early-stage networking events
        • 6.2.4.2. Networking for early biopharmaceutical executives
      • 6.2.5. Becoming partner of choice
    • 6.3. Deal timeframes
    • 6.4. Deal valuation
      • 6.4.1. Factors contributing to the deal valuation
        • 6.4.1.1. Intellectual property
        • 6.4.1.2. Development phase
        • 6.4.1.3. Cost of clinical trials
        • 6.4.1.4. Risks associated with commercializing too late
        • 6.4.1.5. Benchmark values
        • 6.4.1.6. Preclinical/clinical data
        • 6.4.1.7. Risk of failure
        • 6.4.1.8. Size and value of therapeutic market
        • 6.4.1.9. Competition for licensing rights
        • 6.4.1.10. Partner’s expertise/reputation in given field
        • 6.4.1.11. Impact on internal R&D programs
      • 6.4.2. Due diligence as a valuation tool
    • 6.5. Keeping a deal successful
      • 6.5.1. Commitment to the deal
      • 6.5.2. Know your partner
      • 6.5.3. Thorough due diligence
      • 6.5.4. Patent and IP management
      • 6.5.5. Comprehensive deal agreement
      • 6.5.6. Feasible and achievable milestones
      • 6.5.7. Proactive management of issues
      • 6.5.8. Regular communication
      • 6.5.9. Tracking of payments and royalties
    • 6.6. When to negotiate termination
    • 6.7. What makes a deal ‘newsworthy’?
  • 7. Deal terms and trends – An analysis of early stage deals
    • 7.1. Why are deal-terms put in the public domain?
    • 7.2. Does survey data reflect the real deal?
    • 7.3. Headline valuations
    • 7.5. Components of the deal
  • Appendix 1 - Glossary of terms
  • Appendix 2 - Resources
  • Appendix 3 – Complex deal terms: an outline
  • Appendix 4 – Press releases
    • Case Study 4.1
    • Case study 4.2
    • Case study 4.3
    • Case study 4.4
    • Case study 4.5
    • Case study 4.6
    • Case study 4.7
    • Case study 4.8
    • Case study 4.9
    • Case study 4.10
    • Case study 4.11
    • Case study 4.12
    • Case study 4.13
    • Case study 4.15
    • Case study 4.16
    • Case study 4.17
    • Case study 4.18
    • Case study 5.1
  • Appendix 5 - References
  • Appendix 6 – Biographies
  • Acknowledgements
  • Pharmalicensing
  • List of Tables:
    • Table 1. GSK’s - Centers of Excellence for Drug Discovery consists of 7 individual centres
    • Table 2. R&D project mathematical valuation models need to be more complex in order to reflect reality
    • Table 3. Big pharmas dealmaking trends show that they prefer to invest at similar development stages
    • Table 4. The top 5 deal values in Jan 2006 – Oct 2006 combined reached a total of more than $US 1.6 billion
    • Table 5. Top 5 upfront payments between Jan-2006 and Oct-2006
    • Table 6. The top 5 valued University deals, Jan-2006 to Oct-2006
    • Table 7. A summary of different deal types
    • Table 8. Payment strategies – components of the deal
    • Table 9. Variants affecting royalty payments
    • Table 10. Attributes that attract partners
    • Table 11. Major early-stage partnering events
    • Table 12. A selection of networking clubs worldwide
    • Table 13. Early stage deals deal frames – from contact to signature
    • Table 14. Factors contributing to deal valuation
    • Table 15. Ongoing due diligence to keep a deal successful
    • Table 16. A preclinical project is worth significantly less than a phase I or phase II project
  • List of Figures:
    • Figure 1. Amount raised from partnering 1980- 2005
    • Figure 2. Between Jan 2006 - Oct 2006, 6 early stage deals were valued at over $US 100 million
    • Figure 3. Deals disclosing upfront payments between Jan 2006-Oct 2006
    • Figure 4. The values of University deals are significantly lower than biotech deals between Jan 2006 and Oct 2006
    • Figure 5. Key information sources for partnering executives
    • Figure 6. Lead Molecule R&D projects have increased most in value Jan. 2003 to Oct. 2006.
    • Figure 7. Breakdown of discovery deals from 2003 to October 2006*
    • Figure 8. Breakdown of lead discovery deals from 2003 to October 2006*
    • Figure 9. Preclinical deals from 2003 to October 2006*
    • Figure 10. Average total upfront payments by stage of development at deal closing ($ million)
    • Figure 11. Average royalty rates by stage of development at deal closing (%)