issue 18 august 2012 business development & licensing...

Business Development & Licensing Journal For the Pharmaceutical Licensing Groups

Issue 18 | August 2012 www.plg-uk.com

Biotech turns to strategic alliances as VCs flee

Licensing deals: make provision for termination

Small pharma may offer better partnerships

Striking a balance on off-label and unlicensed use

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Business Development & Licensing Journal is published by:The Pharmaceutical Licensing Group (PLG) LtdThe Red HouseKingswood ParkBonsor DriveKingswoodSurrey KT20 6AY

Tel: +44 (0)1737 356 391Email: [email protected]: www.plg-uk.com

Editorial boardSharon FinchEditor

Neil L BrownSpePharm, France

Riccardo Carbucicchio Switzerland

Joan ChypyhaAlto Pharma, Canada

Roger CoxPlexus Ventures, Benelux

Jonathan FreemanMerck Serono, Switzerland

Jrgen LanghrigBavarian Nordic A/S, Denmark

Leslie PryceNew Business Horizons, Japan

Irina Staatz GranzerStaatz Business Development & Strategy, Germany

Enric TurmoEsteve, Spain

AdvertisingAdam CollinsTel: +44 (0)1737 224 344Email: [email protected]

Publishing services Provided by Grist www.gristonline.com

Court cases seem to be dominating the news lately,

with Pfizer and GSK making huge settlements

for illegal marketing activities. Other cases seem to

just run and run; some three years on from

when the investigation began, the European

Commissions Pharmaceutical Sector Inquiry has yet to

be concluded. The EC has recently informed several

pharmaceutical companies including Lundbeck

and Servier of its objections to practices that

it believes may have delayed the entry of generic

products into Europe, and which could be in breach of EU antitrust rules.

The cases against Lundbeck and Servier represent the EUs first case

investigating so called pay-for-delay agreements. This seems to be the tip of

the iceberg as antitrust investigations are also ongoing against other companies

such as Teva, Johnson & Johnson and Novartis for possible violations.

The long periods of uncertainty in such cases are even worse in the US.

For instance, the lawsuit based on a 1997 deal, where Schering-Plough paid

Upsher-Smith to delay the introduction of a generic K-Dur until 2001, is still

working its way through the courts today. A recent appeals panel in Philadelphia

did not agree with the original judgment where the courts allowed the

application of a patent to restrict the application of antitrust law. Of course, until

this reaches the US Supreme Court, there may still be scope for further appeals.

Such ongoing uncertainty is not helpful. This issue of the journal includes an

article on the issues around termination. Bringing clarity to the ending a business

relationship is an important feature of being a partner of choice but not

always one that is appreciated at the time.

WelcomeStrategic alliances in an uncertain marketMatthias Havenaar and Peter Hiscocks, University of Cambridge

Venture capital firms face difficulty financing new funds focused on

biotech, so companies are turning to strategic alliances with pharma.

PLG eventsA round-up of forthcoming meetings around Europe.

Early termination of license agreements Dr Constanze Ulmer-Eilfort, Baker & McKenzie

When entering into a license agreement it is critical to consider

contractual provision for termination and its potential repercussions.

How smaller companies can stand out from big pharma in biotech dealsPierre Boulud, Ipsen

Small to mid-sized pharmaceutical companies can offer unique

characteristics, making them a valid option for biotech firms.

Lessons from litigation Patrick Duxbury and Kevin Jones, Wragge & Co LLP

In any proposal to sell or license an early stage pharma or biotech

product, valuation will inevitably be the most difficult issue and

presents pitfalls that should be avoided where possible.

The balancing act of unlicensed and off-label useTalitha Shkopiak, Taylor Wessing

A legal judgement on the use of a medicine off-licence could set a

precedent that will have important consequences for pharmaceutical

companies and the NHS.

Deal watchRoger Davies, Medius Associates

A look at recent major deals, including the $3 billion acquisition of

Human Genome Science by GSK.

Contents4

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10

16

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Publishers note The views expressed in Business Development & Licensing Journal are those of the authors alone and not necessarily those of PLG. No responsibility for loss occasioned to any person acting or refraining from action as a result of the material in this publication can be accepted by the Publisher. While every effort has been made to ensure that the information, advice and commentary is correct at the time of publication, the Publisher does not accept responsibility for any errors or omissions. The right of the author of each article to be identified as the author of the work has been asserted by the author in accordance with the Copyright, Designs and Patents Act 1988.

Sharon FinchEditor, Business Development & Licensing Journal

The Business Development & Licensing Journal is free to PLG members. If you

would like to join the PLG please visit the website at www.plgeurope.com

www.plg-uk.com Issue 18 | August 2012 3

Biotechnology (biotech) companies operate in a market that is determined by many risk factors including regulatory, technical and market

elements. Apparent concern over these

issues is reflected a survey published in

October 2011 by the US National Venture

Capital Association. According to the

survey, 39% of 150 venture capital (VC)

firms interviewed indicated they had

decreased investment in biotech start-ups

during the past three years, and the same

number expect to continue to do so over

the next three years.2 Numerous VC firms, including 3i,

Excalibur and Prospect, have pulled out

from investing in biotech altogether.

Most VC funds also have investment

horizons too short to finance research and

development projects all the way from

discovery to market. Since early stage

biotech companies rely heavily on VC

funding, they are unable to raise sufficient

capital to develop one product all the way

to market, let alone multiple products. It

is therefore close to impossible to build a

sustainable biotech company on VC alone.

Strategic alliances Biotech companies also rarely see

direct revenues from their projects and

thus need to be creative with funding.

Because of this, strategic alliances with

pharmaceutical companies (pharma)

have become a popular alternative

to VC funding. By collaborating with

The high failure rate of biotech start-ups, a tightening regulatory environment, pressure pricing and the lack of successful public offerings mean financial institutions are sceptical about biotech. Many perceive drug development as too long, too risky and too expensive.1 Venture capital firms face great difficulty financing new funds focused on biotech.

By Matthias Havenaar and Peter Hiscocks, University of Cambridge

pharma, biotech companies are able to

secure revenue with which to build their

company. One successful example of this

is Galapagos, the Dutch biotech, which

collected about twice as much from

strategic alliances with pharma than it did

from its IPO and VC rounds combined.

Alliances, however, can prove to

be an extremely unreliable source of

income. Despite the industry mantra

of becoming the partner of choice,

pharma is notorious for terminating

alliances. According to Recap Deloitte, in

the period 19772010 as many as 71%

of all product alliances were terminated

before the drug reached market, with

only 33% of terminations resulting from

a lack of efficacy or safety. Moreover, of

all terminated alliances, 55% of products

are still pursued by the licensor.3 This

suggests that a significant proportion

of the programmes that are terminated

are scientifically viable. In addition, there

seems to be a trend towards terminating

programmes at an earlier stage. Pharmas

unspoken mantra seems to have become:

terminate often, terminate early.4

Termination can hurt the licensor

by damaging public perception of the

quality of the drug or company. The

cost of termination is reflected in the

drop in licensor stock price witnessed

when an alliance has been terminated.

One example of this is the termination

of Celltechs TNF-inhibitor monoclonal

antibody (mAb) Cimzia.

About the authorsMatthias Havenaar followed the Masters

in Bioscience Enterprise at the Department

of Chemical Engineering and Biotechnology,

University of Cambridge. He was awarded the

Dawson Scholarship by the Pharmaceutical

Licensing Group in 2009.

T: +31 (0) 651 234 066

E: [email protected]

Peter Hiscocks is director at Rivers Capital

Partners and fellow in entrepreneurship

at Judge Business School, University of

Cambridge.

T: +44 (0) 770 2167 272


Strategic alliances in an uncertain market

4 Business Development & Licensing Journal www.plg-uk.com

When Pfizer returned its rights in

November 2003 after failing to renegotiate,

Celltechs shares plunged by as much as

27%. Cimzia, however, is now marketed

for the treatment of Crohns disease.

Another example is Exelixis anti-cancer

drug cabozantinib, which was partnered

to Bristol-Myers Squibb (BMS). On the day

BMS announced its decision to terminate

the alliance in June 2010, Exelixis stock

dropped 16%. Despite this, development

of cabozantinib is now being continued

by Exelixis for a number of oncology

indications.

In many cases deals are renegotiated

before they are terminated. Renegotiation,

however, is also costly as it leads to delays

and thus to lost opportunity cost. In

addition, renegotiation of financial terms

is particularly difficult since the negotiation

often appears to be a zero-sum game.

As Sharon Finch and Jill Ogden fittingly

pointed out in issue 14 of this journal,

there is a lack of flexibility and future-

proofing of licensing contracts during

negotiations.5 We argue that alliances with

more financial flexibility have a greater

chance of success. The approaches used to

determine financial valuation of a licensing

deal often fail to incorporate market risk

and as a result many alliance contracts

react poorly to changes in the market.

Deal structuringThe most commonly used methods

for determining deal structures are

benchmarking and discounted cash flow

(DCF) analysis.

Benchmarking gives an indication of

what the market is prepared to pay for

comparable deals and thus provides a

straightforward method to determine the

potential value of a deal. The problem

with benchmarks, however, is that they

are based on historical data. Changes

in the market may mean they are out of

date. In addition, available data are likely

to be biased due to the selective reporting

of deal terms, which causes benchmarks

to be skewed towards the better deals.

DCF analysis provides more fundamental

insight in the value of a particular deal.

But the static nature of DCF models is a

significant drawback; they are built on

point estimates, such as expected peak

sales and net present value (NPV), so

indicate the average expected outcome

or the most likely scenario without

offering insight into the probability of that

outcome occurring. Throughout a decade

of development, changes in economic

conditions or clinical profile of the drug can

change the sales outlook drastically. This

can mean the financial terms on which an

alliance was built are no longer satisfactory.

One common approach to value

alliances from the perspective of a biotech

company using DCF is to estimate the

peak sales of the drug, then outlay all the

costs, milestones and royalty payments

coming from the alliance and finally

to discount these cash flows by the

Of all terminated alliances, 55% of products are still pursued by the licensor. This suggests that a significant proportion of these programmes remain viable.

>>


>> appropriate risk-adjusted cost of capital. This can be summarised in the following

equation, where NPV is the risk-adjusted

net present value of undertaking the

alliance, P is the probability of incurring

revenue R or cost C in year i, and r is the

discount rate:

The drawback with using this approach

is that DCF is static and so does not

include market risk. Financial deal terms

based on this model will lead to a lack

of flexibility of the alliance when market

conditions change.

To illustrate this we will take a

hypothetical Phase I project mAb-1,

owned by Biotech A that will be licensed to

Pharma B. Let us assume that both parties

agree on the most likely scenario of $800

million peak sales and a corresponding NPV

of $200 million. Let us also assume that

after long hours of negotiating, A and B

have agreed to the M&R payment scheme

shown in Table 1. The M&R scheme comes down to a 1:4 (20%:80%) division of value

in favour for pharma.

As the sensitivity analysis of Figure 1 shows, however, the 1:4 division is only

realised when peaks sales are exactly

as projected. The figure also reveals

that Pharma B will seek to renegotiate

or terminate the partnership once

peak sales projections fall below $230

million. At this point the combination of

development costs and M&R payments

will be higher than projected sales,

causing the NPV to fall below zero.

Although high milestones are seemingly

attractive to the licensor, they are in fact

hazardous to the partnership in down

scenarios, as they are fixed and take

away flexibility.

Adding flexibilityThese findings suggest that changes in the

economic environment or clinical profile

of the drug could lead to termination of

perfectly viable drugs that could benefit

patients. In other words, the financial

terms of the deal play a significant part in

the success of the partnership and hence

whether the drug will reach the market.

We believe that this can be mitigated by

increasing the degree of financial flexibility

in licensing contracts. In the remainder of

this article we describe a framework that

Figure 1: Sensitivity analysis Shows the sensitivity analysis of NPV for both

Biotech A and Pharma B (y-axis) against estimated

peak sales (x-axis). As this figure shows, the 1:4

division is only realised when peak sales turn out

at exactly $800 million. Pharma B will abandon the

project once the peak sales estimate falls below

$228 million.

Scheme agreed between Biotech A and Pharma BUpfront 5

Phase II 10

Phase III 10

BLA filing 15

Launch 25

Royalty rate 5.0%

Total NPV Biotech A 40

Table 1: M&R payment scheme

Estimated peak sales ($ million)

Div

isio

n o

f v

alu

e

100%

100 200 300 400 500 600 700 800 900 1000

80%

60%

40%

20%

0%

PHARMA B

BIOTECH A

?

?


can be used to determine the financial terms

of a deal, taking into account market risk.

As the example of mAb-1 shows, standard

M&R contracts do not offer a great deal

of flexibility in a changing market. It is

therefore advisable to incorporate one or

more elements of financial flexibility into

the contract. To achieve this we use a

combination of variable royalties and flexible

milestones. Other elements of flexibility

include sales milestones, indication driven

milestones, and caps and collars on royalties;

these methods could be equally valid but are

not further discussed in this article. Variable

royalties are an accepted approach to address

uncertainty in peak sales.6

In current practice, however, they

usually deal with the division of the

upside. As we will show below, royalty

tiers can also be tailored to deal with

down scenarios. Furthermore, we suggest

flexible milestones as an option to increase

latitude. With flexible milestones partners

will have to re-evaluate the market for the

product when each milestone is reached,

to determine the size of the payment. One

approach to this could be using a specific

market forecast model that is agreed by

both parties in advance. Changes in the

indication might also lead to changes in

development cost so it may be necessary

to deal with these costs as well.

Let us have another look at our

hypothetical monoclonal mAb-1. Table 2 shows the value that each party will receive

using variable royalties. Between estimated

With flexible milestones partners will have to re-evaluate the market for the product when each milestone is reached, to determine the size of the payment.

peak sales of $400 million and $1 billion

the division of risk and reward is stable.

As Figure 2 indicates, the project is worth executing in a larger range of scenarios

than when fixed royalties and milestones

would have been used. Only if the market

size falls below $170 million will the

pharma company decide to abandon the

project for economic reasons.

ConclusionThe need for flexibility in licensing

contracts is clear. Our proposal of a

simple valuation framework deals with

market uncertainty, enabling biotech

and pharma dealmakers to negotiate

alliances that have a higher chance of

survival in uncertain market conditions.

Using variable royalties and flexible

milestones, contracts can be tailored to

share the downside and the upside from

unanticipated market changes.

Sales Royalties NPV A NPV B0 0% 5 (50)

100 0% 5 (20)

200 0% 8 8

300 0% 10 37

400 2% 15 62

500 3% 22 86

600 4% 28 111

700 5% 34 136

800 5% 40 160

900 5% 46 185

1000 6% 52 209

Table 2: Variable royalty scheme Figure 2: Sensitivity analysis The division value for each party (y-axis) against

estimated peak sales (x-axis) if variable royalties

are used. As this figure shows, the 1:4 division is

maintained at peak sales of $0.4 1 billion. Pharma

will abandon the project only once the peak sales

estimate falls below $173 million.

>>

Estimated peak sales ($m)

Div

isio

n o

f v

alu

e

100%

100 200 300 400 500 600 700 800 900 1000

PHARMA B

BIOTECH A

80%

60%

40%

20%

0%

www.plg-uk.com Issue 18 | August 7

With this framework both parties will

retain a pre-agreed division of value and

thereby keep the alliance healthy. This will

increase the probability of viable, non-

blockbuster status drugs reaching patients.

Many readers will note that alliance

termination is not always about changes

in the market or product efficacy.

Termination by pharma often results

from changes in corporate goals. For this

reason, flexible terms in alliance contracts

may be valuable for coping with changes

in partners strategies as much as for

changes in the broader market.

One reservation biotech companies

could have in applying this model is that

they have to bear a larger portion of risk.

Biotechs might wish to reduce risk by

maximising milestone payments. However,

fixed milestone payments increase the risk

of termination of the partnership. This

should be avoided because the costs of

termination are high since, in many cases,

commercially viable products are dropped.

Furthermore, after alliance termination

the drug company might be perceived

as having made incorrect decisions in

the marketplace. Negotiating a deal that

shares risk also enables the transaction to

take place, which increases the probability

of working with the partner of choice,

enhancing the image of the biotech

company. This in turn could be used to

help secure future deals or further venture

capital funding.

Flexible terms in alliance contracts may be valuable for coping with changes in partners strategies as much as for changes in the broader market.

>> References 1 Cockburn I, Lerner J. The Cost of Capital for

Early-Stage Biotechnology Ventures.

National Venture Capital Association. 2009.

Available at www.nvca.org

2 NVCA MedIC Vital Signs: The Threat to

Investment in U.S. Medical Innovation and

the Imperative of FDA Reform. National

Venture Capital Association. 2011. Available

at www.nvca.org

3 Orelli B. Youre Fired! A Quantitative

Analysis of Dissolved Deals. Bioworld

Insight, 2011; 19.

4 Carroll J. The top 10 biotech deal

terminations of 2011. December 2011.

Available at www.fiercebiotech.com/

node/262865

5 Ogden J, Finch S. Overcome the obstacles

to effective renegotiation. Business

Development & Licensing Journal 2011; 14:

2023.

6 Borshell N. The Royalty Rate Report 2010:

A Comprehensive Assessment of Valuation

in the Pharmaceutical Sector.

PharmaVentures, Oxford, 2010.

Our simple valuation framework enables biotech and pharma to negotiate alliances with a higher chance of survival.

This article is based on work submitted by

M. Havenaar as a thesis requirement for the

Masters in Bioscience Enterprise at the

University of Cambridge, and published: M.

Havenaar M, Hiscocks P. Strategic alliances

and market risk. Drug Discovery Today, 2012;

17:824-7. Model data available on request.


European PLG events201213

1719 September 6th European Pharmaceutical Licensing Symposium Budapest, Hungary

www.plgeurope.com

27 September PLCF Meeting Increasing Focus on Emerging Markets Paris, France

www.plcf.org

45 October PLGS General Assembly Tarragona, Spain

www.plgs-spain.com

1719 October PLG UK Introductory Training Course Lingfield, UK

www.plg-uk.com

2931 October PLCD Seminar Business Development & Licensing Berlin, Germany

www.plcd.de

12 November PLG UK Autumn Meeting Cambridge, UK

www.plg-uk.com

2223 November PLCD Autumn Meeting Munich, Germany

www.plcd.de

2223 November PLG Italy Meeting Market Access Rome, Italy

www.plgitaly.it

4 December PLG UK Christmas Drinks Reception & Workshop London, UK

www.plg-uk.com

7 February PLG UK AGM & Awards Night Dinner London, UK

www.plg-uk.com

3031 May PLCD Spring Meeting Darmstadt, Germany

www.plcd.de

September XI International Pharma Licensing Symposium Dublin, Republic of Ireland

www.plgeurope.com

2012

2013

?

P arties entering into a license agreement are enthusiastic about concluding the deal and working together, and do not want to think

about termination. But the majority of

all collaboration and license agreements

for a compound in pre-clinical or clinical

development are being terminated before

any commercial sales. The licensee will ask

for flexibility in order to be able to move

away from its performance obligations. The

licensor, on the other hand, will want to

ensure that the licensed technology is not

devaluated by an early termination and that

the development project or the marketing of

the licensed technology is not delayed.

Several different types of events may

trigger a termination, and each has a

different potential remedy.

Termination at willIn these circumstances, the licensee will

want to have the flexibility to terminate a

license agreement, either at any time and

without any cause, or for defined reasons,

such as commercial or scientific viability of

the licensed technology. A licensee that loses

interest in the licensed technology or no

longer believes that the technology will be

successful does not want to remain bound

by the agreement, namely by the duty to

meet certain performance obligations. It may

not be advisable for the licensor to bind the

licensee to a technology they are no longer

interested in. In such situation a commercial

solution should be found.

As is often the case with marriage, the possibility of an early termination and its potential consequences are often disregarded when entering into a license agreement. Addressing the possibility of divorce in advance may point to a lack of confidence in a joint future, but provision for license termination and its repercussions is critical.

Dr Constanze Ulmer-Eilfort, LL.M., Attorney-at-Law, Baker & McKenzie, Munich

For the licensor, a termination at will can

have severe negative consequences. Finding

a new licensee tends to be difficult if the first

licensee when terminating has documented

its diminished interest in the technology. To

mitigate such negative consequences, the

licensor may want the termination agreement

to allow a statement that the licensor has

reacquired the technology, rather than

received a notice of termination.

Furthermore, the licensor should ask

for compensation for losses incurred as a

result of such termination. Since it tends to

be difficult to prove the damages actually

incurred, providing for an exit fee to be paid

upon termination is advisable. This fee could

either be specified, or at least the formula to

calculate it, in the license agreement.

The licensor, on the other hand, typically

does not have a right to terminate at will.

The licensee cannot agree to the risk of

losing access to the licensed rights in the

event that the licensor finds a better way to

exploit the technology.

Termination for material breachIn this scenario, the licensor has the right

to terminate if the licensee is in material

breach of obligations under the agreement

and does not make good such a breach

within the agreed rectification period. The

licensee may be in material breach if it does

not make agreed payments on time or if it

does not meet performance obligations, for

example not commencing the studies or the

marketing required to exploit the technology.

About the authorDr Constanze Ulmer-Eilfort is a Partner

at Baker & McKenzie Partnerschaft von

Rechtsanwlten, Wirtschaftsprfern,

Steuerberatern und Solicitors in Munich.

She has more than 15 years experience

in advising high-tech, pharmaceutical and

media companies on the commercialisation of

intellectual property rights.

T: + 49 (0)89 5523 8236


Early termination of license agreements


In order to avoid disputes over whether

there is a material breach, the license

agreement should specify the obligations

considered material and set out the

conditions under which such obligations

would be seen as breached. Otherwise,

depending on the applicable law, standard

practice is that it would be unreasonable for

the licensor (the terminating party) to remain

bound to the license agreement (under

German law, for example), or that the

breach deprives the licensor of the essential

benefits of the license agreement (under the

laws of England and Wales, for example).

The license agreement should provide

rectification periods, giving the licensee

the chance to rectify the breach to avoid

termination. Only if this last chance

period expires without the material breach

having been addressed is it reasonable for

the licensor to terminate. The length of

such periods may depend on the specific

obligations the license agreement may,

for example, specify a rectification period of

15 days for payment obligations, while the

period for breach of performance obligations

may be as long as six months.

In practice, the termination of the license

agreement by the licensor after licensee

breach is often not accepted by the licensee.

There may be dispute over whether the

licensee is in breach and/or whether the

breach is material. Such dispute results in an

unfavourable situation for both parties, with

uncertainty as to whether termination has

come into effect. The licensor may not be

able to find a new licensee willing to take

the risk that the original license is void, while

the licensee will not want to make further

investments into the technology if there is a

risk that it no longer owns the license. Either

party would have to file suit or commence

arbitration proceedings (whatever dispute

resolution process is agreed) to obtain

a declaratory judgment on termination.

This may take years and therefore has the

potential to destroy the commercial value of

the technology.

The license agreement should address

this possibility. A solution may be to specify

that if the licensee disputes the validity of

termination for breach, it must promptly

begin dispute resolution proceedings, that

an expedited process is to apply and that

the license in such event remains effective

pending a decision. Furthermore, if the

termination is subsequently declared valid,

the licensee would have to compensate

the licensor for damages incurred through

delaying the effective date of termination.

The licensee typically does not want

to terminate for a material breach by

the licensor. Unless otherwise agreed, a

termination would mean that the rights

to the technology revert to the licensor. If

there is a material breach by the licensor, for

example if it does not prosecute, maintain or

defend the licensed technology, or because

the licensee is in breach of its confidentiality

obligation by disclosing the licensed know-

how to a third party, then the licensee may

obtain a preliminary injunction and claim >>

The majority of all collaboration and license agreements for a compound in pre-clinical or clinical development are being terminated before any commercial sales.

?


damages but it would still not want to lose

the license.

Alternatively, the license agreement

can specify that, in such an event, the

licensee retains the right to use the licensed

technology, and that the terms and

conditions of the license agreement are

amended to reduce either partys reciprocal

obligations. However, such a structure needs

to be considered carefully so that it does not

provide incentives to improve the rights and

obligations by way of a termination. Some

agreements even provide that, in the event

of a breach by the licensor, the licensee

could retain the licensed technology and

would no longer have to make payments

to the licensor. This typically is not a fair and

adequate response to licensors breach.

InsolvencyIn looking at insolvency, a distinction needs

to be made between the insolvency of the

licensor and that of the licensee.

The licensor may want to terminate if the

licensee is insolvent and therefore no longer

in a position to invest in the technology and

make the agreed payments. Depending

on the applicable insolvency law which

is the insolvency law applicable at the

residence of the insolvent company and not

the law on which the parties agreed in the

license agreement there may be a ban

on terminating the license agreement and/

or the administrator in insolvency may have

the option to assume the license and meet

its obligations, or allow termination. It is

advisable to act promptly and review what

means need to be taken to mitigate the

damages resulting from the insolvency of

the licensee.

Insolvency of the licensor is the most

critical situation, however. This is not because

the licensee would want to terminate, but

because the administrator in insolvency of

the licensor may take the licensed technology

away from the licensee. Under many laws

(the insolvency laws of the insolvent licensor)

the administrator in insolvency has an option

to assume or reject the license. The licensee

who has invested for years in a technology

may be confronted with a situation in which

the administrator decides that it is preferential

for the creditors to have the technology

exploited by someone else. Such a decision is

possible, for example, in Germany, England,

Switzerland, Austria and Sweden.

Often, one of the most difficult issues in

negotiating license agreements is to find an

acceptable mechanism to protect the licensee

in the event of licensor insolvency. While

the licensee will ask for a transfer of patent

rights, the licensor cannot dispose of rights

that would deprive them of other ways to

exploit the technology (outside the licensed

field, for example).

In the US, insolvency laws were amended

in 1988 to protect the licensee. According to

Sec. 365 (n) of the US Bankruptcy Code, the

licensee may elect to retain its licensed rights

provided payments continue to be made and

waives all claims against the licensor under

the agreement. Many other countries have

>> Insolvency of the licensor is the most critical situation because its administrator in insolvency may take the technology away from the licensee.


The licensor may want to terminate the license agreement if there is a change of control in the licensee if its shares have been taken over by another company. The licensor will want to avoid a situation in which the licensee is a competitor.

recently amended their laws accordingly,

including Canada and France. In Germany,

an amendment to the Insolvency Act is being

discussed in order to protect licensees.

Challenge of licensed patent rightsThe licensor will want a right to terminate the

license agreement if the licensee challenges

the licensed patent rights. Non-challenge

clauses in license agreements, stating that

the licensee shall not challenge the rights,

are not effective under applicable EU Block

Exemption Regulations. However, a right to

terminate in the event of such a challenge

is effective this provides almost the same

protection to the licensor as a contractual ban

on such challenges.

In the US, formerly it was not possible

for a licensee to challenge the licensed

technology. Under the principle of license

estoppel, there was an implicit obligation of

the licensee not to challenge. However, the

Supreme Court decision Medimmune vs.

Genentech 127 S.Ct. 764 (2007) changed

this. Now, US license agreements also

tend to provide for a right of the licensor

to terminate if the licensee challenges the

licensed patent rights.

Change of controlThe licensor may want to terminate the

license agreement if there is a change of

control in the licensee if its shares have

been taken over by another company.

The licensor will argue that it needs to

avoid a situation in which its licensee is

a competitor, or in which it becomes a

company that has a history of failing to

meet contractual obligations or infringing

intellectual property rights.

For the licensee, such right to terminate is

difficult to accept. First, the licensee will baulk

at the risk of losing the licensed technology;

second, any corporate transaction may

become difficult as a potential buyer will be

held up by such change of control provision.

The licensee will try to convince the licensor

that a right to terminate for change of

control is not required. Specific provisions can

offer a compromise. For example, the license

agreement may provide that, in the event

the licensee is taken over by a competitor

of the licensor, the licensor will no longer

be obliged to make available improvements

to the technology, and that the licensor has

additional means to monitor the performance

of the license agreement by the licensee.

The licensee typically does not have and

will not need a right to terminate the

license agreement in the event of a change

of control of the licensor. However, the

licensee may request that his obligations to

share development results with the licensor

and to open his books to the licensor are to

be amended and restricted if the licensor is

taken over by a competitor of the licensee.

Consequences of terminationThere are several possible consequences of

termination as set out below:

(a) Reversion of rights While the license agreement may provide >>


that upon expiry of the license agreement

the licensee retains a fully paid up license,

in the event of a termination the licensee

should not retain any rights to the licensed

technology. The license agreement should

expressly state that, in the event of a

termination, the rights to the licensed

technology automatically revert to the

licensor. Otherwise and depending on

the applicable law, it may be necessary

to re-assign and re-transfer the licensed

technology to the licensor.

(b) Transfer of the project to the licensor The licensor or its new licensee will

want to be in a position to continue the

exploitation of the licensed technology

without losing too much time or

incurring additional costs and expenses.

Consequently, the licensor will have to

claim:

i access to the development results

controlled by the licensee, including

development data, marketing data and

corresponding documentation;

ii a license to improvements generated

by the licensee and to any background

intellectual property rights of licensee

that are necessary to continue the

development and marketing of the

licensed technology;

iii a license to any trademarks of the

licensee under which the licensed

technology is marketed;

iv a transfer of regulatory approvals or

the status as an applicant for regulatory

approvals;

v a transfer of materials owned by the

licensee, as the licensee will no longer be

able to use such material; and

vi a transfer of agreements with CROs and

CMOs in order to be able to take over

ongoing studies and/or the manufacture

of products. To the extent a study

cannot be assigned to the licensor, the

agreement should provide that the

licensee continues the study on behalf

and at the cost of the licensor.

To avoid losing time, it may be advisable

to exchange data and improvements

during the term of the license agreement.

Experience shows that, after termination

of the license agreement, the licensee will

have less incentive to meet its contractual

obligations than during the time when the

agreement was effective.

In negotiating these consequences of

termination, the licensee often requests

some financial compensation, for example

a refund of its development costs,

and/or a royalty on sales based on its

technology. Whether such compensation

is appropriate needs to be decided on a

case-by-case basis. The licensor will argue

that the licensee decided that it was no

longer interested in the technology and

should therefore not expect to benefit

from a reversion of rights to the licensor.

Furthermore, access to data, improvements

and regulatory approvals may be perceived

as a compensation for damages incurred

by the licensor as a consequence of an

early termination of the agreement.

>> The agreement should expressly state that, in the event of a termination, the rights to the licensed technology automatically revert to the licensor.

?


(c) Assumption of sublicense agreements When entering into a sublicense

agreement, the sublicensee needs to be

concerned about a potential termination

of the main license agreement. The

sublicensee typically has no influence

on the main agreement; if the main

agreement terminates, the sublicensee also

loses its rights to the licensed technology.

The main agreement should address

this issue and provide for protection of

a sublicense. The licensor should agree

to assume the sublicense (to enter into a

direct license with the sublicensee if the

main license terminates). The main license

would provide that the licensor shall

not be bound by any obligations of the

sublicensor that go beyond the obligations

of the licensor towards the licensee. Such

obligation of the licensor under the main

license will provide the reassurance a

sublicensee is looking for. The clause in the

license agreement could read:

Upon termination of this License

Agreement irrespective of the reasons for

such termination all sublicenses which

the Licensee has granted in accordance

with this License Agreement shall

continue to exist and shall be transferred

from Licensee to Licensor. However, the

Licensor shall not be obliged to honour the

Licensees obligations from sublicenses if

such obligations do not correspond to the

Licensors obligations in accordance with

this License Agreement.

ConclusionThe reasons that may justify an early

termination and the consequences of

such termination must be fully considered

when entering into a license agreement.

Some creativity is required to capture all

the different events that may occur, and

negotiating provision for these is not easy as

it requires the parties to address situations

they never want to happen.

Carefully drafted termination provision can,

however, be essential to protect the value of

the licensed technology. Experience shows

that, if the parties need to revisit the terms

of the license agreement, the provisions on

termination and consequences of termination

tend to be the ones that are most frequently

read and analysed.

Careful termination provision can be essential to protect the technology. If the parties need to revisit the terms of the agreement, the provisions on termination and its consequences tend to be the ones that are most frequently read and analysed.


If constructed correctly, a partnership should allow all parties to pool knowledge and resources and mutually boost capabilities. Depending on the deal signed,

the partnership can bring new drugs to

market faster or increase sales. The financial

benefits on both sides can be significant.

When a biotech company makes a decision

to enter into a partnership with either big

pharma or a small to medium-sized firm, it

needs to weigh up all the options. It must ask

whether the company is prepared to share

the same commitment as well as the risks.

During due diligence, a biotech company will

also look at the other companys financial,

research, development, manufacturing and

marketing resources. Equally important is the

number of successful deals it has achieved.

However, they should be considering not

only signing a successful deal, but also the

chances to extend the success over the long

term for the benefit of both partners.

Open minded approachNow classified as a specialty care

pharmaceutical company, Ipsen has a broad

reach to biotechnology and other healthcare

companies. Some of the partnerships

achieved by Ipsen in the early years now form

the backbone of our operations today. Even

though the whole industry is vocal about

having an open innovation model and fosters

partnership, an organisation the size of Ipsen

must form partnerships to gain access to key

competencies and sustain its growth. The

partnership gene goes beyond the business

Partnering efforts can be a vital element to the long-term strategy of a biotech company. Small to mid-sized pharmaceutical companies can offer unique characteristics, making them a valid option for consideration.

By Pierre Boulud, Executive Vice-President, Corporate Strategy, Ipsen

development teams to include teams in

research, development, manufacturing and

commercial operations.

In addition to these partnerships,

Ipsens organic growth allows it to have

the sustainability it needs to search for

partnership opportunities.

In the early days, as now, the people

in charge of business development

opportunities entered into discussions with an

open mind and a willingness to collaborate to

mutual benefit.

In the ten years I have been at Ipsen, our

partnering discussions have held on to the

same spirit and flexibility. Indeed, our present

organisational structure allows for easier and

rapid access to decision-makers. We strive to

move partnering processes forward rapidly.

Our uniqueness extends to our ability

to offer flexibility and creativity in deal

structuring across in-licensing, out-licensing,

joint development, co-marketing and co-

promotion, as well as joint ventures including

spin-outs.

Four key differentiation features On exploring further, we believe that there

are four areas that set a medium-sized

company like Ipsen apart from big pharma

(see Figure 1).

Dedicated teams An agreement

between Ipsen and a biotech company

in 2011 suggests that fully dedicated and

committed teams were key to the deal.

As a business development team can

be relatively small, the same business

About the authorPierre Boulud was appointed a member of

Ipsens Executive Committee in June 2011.

He joined Ipsen in 2002 as a manager in

Corporate Strategic Planning and has since

held positions as General Manager of Ipsen

Spain and Vice-President of Corporate

Strategic Marketing. Pierre is an ESSEC

graduate and before joining Ipsen, he worked

as a Senior Consultant and Project Leader at

the Boston Consulting Group.

T: +33 1 5833 5291


How smaller companies can stand out from big pharma in deals with biotech firms


development director is usually present from

the first meeting to assess the opportunity

right up to the closing of the deal. This allows

minimises disruption during the transaction

process on the Ipsen side, and builds trust

with the partner by conveying consistent

messages throughout.

Team commitment also applies to the

wider project team, which includes specialists

from clinical development, market access,

regulatory and finance. Core members

from each team can be fully dedicated

to the project from the beginning of the

due diligence through to deal completion.

Again, this results in minimal disruption and

facilitates the building of open and honest

relationships and trust among the technical

teams.

Business focus Business commitment is the

second area in which a medium-sized company

can bring benefits to a biotech firm.

Due to the relatively small number of areas

of therapeutic interest at Ipsen, it is highly

unlikely that Ipsen will review its priorities or

become distracted. This translates into stability

and low risk for prospective biotech partners.

Any in-licensing opportunity selected by

Ipsen must fit well within the scope of our

therapeutic areas. A recent agreement for a

marketed product was signed because larger

potential partners could not give sufficient

confidence and visibility about the resources

allocated to the licensor. For the licensor it was

also about making sure that its partner would

be fully committed to maximising the value

potential of the drug.

Top management involvement A third

important area is the level of involvement

given to a potential transaction by top

management. As a mid-sized company, senior

management will have fewer conflicting

agendas and priorities. Key issues can be

discussed at the highest level, allowing speedy

execution and rapid closing of the terms.

Senior level management meetings on

strategic alliances are a key feature at

The same business development director is usually present from the first meeting to assess the opportunity right up to closing the deal, which builds trust.

Figure 1: Ipsens structure

1 2

43

POSSIBLE DIFFERENTIATION

DEDICATED TEAMS

TOP MANAGEMENT INVOLVEMENT

BUSINESS FOCUS

FLExIBILITY

>>


Ipsen every six months. When terms were

renegotiated with one of our long-standing

partners in early 2012, we stipulated that a

meeting between CEOs should take place.

This meeting led to the key discussion levers

being identified as well as the boundaries

to respect on both sides. The result was an

expedited, successful outcome. Enabling a

biotech company to access decision-makers

easily facilitates not only deal-making but also

successful alliance management.

Flexibility This can describe the

interaction among different teams and also

geographic agility.

Whereas Ipsen cannot make the high

investments of the larger companies, it

has deal engineering agility. During recent

discussions with a small biotech company,

Ipsen was in competition with two larger

companies for a highly innovative, early

stage compound. Our proposal was a

co-development plan to retain the science

that was on their side, their involvement in

future tasks and mutual benefit from our

respective areas of expertise. This approach

was perceived as a favourable alternative to a

straightforward acquisition of the intellectual

property proposed by other partners.

Geographic agility in the deal structure

is also a way to differentiate companies

of Ipsens size. Biotech companies in the

US usually like to retain national rights to

maximise their potential value in case of

success. Ipsens geographic footprint can

provide them with a single partner to deal

with the geographic complexity outside

North America Ipsen has a strong presence

in Europe, Russia, China and Brazil while

having a co-promotion in the US.

Room for improvementMid-sized organisations are also confronted

with specific challenges. At Ipsen, these fall

into three categories.

As a smaller company we are seen as agile,

but are we agile enough given our size? It is

an asset that decision making can be quick

but it also must be well informed. To tackle

this potential pitfall a programme is currently

in place to review our governance and make

our processes more effective.

Small to medium-sized pharma firms

must strive to achieve a high level of

professionalism in order to compete with big

pharma. They will not have the same vast

pool of talent and expertise at their disposal

and so must focus on career development

and constantly be looking for fresh talent. At

Ipsen we have initiated a People Review and

People Development programme to ensure

best use of our key talents.

Smaller pharma can also be guilty of

delusions of grandeur. Blue sky thinking

on deals is good, although creativity and

vision inevitably need to take a realistic step

backwards. Alternative financing is therefore

an option we adopt to allow us to consider

bigger potential deals.

ConclusionIpsens recent success suggests that

a small to medium-sized company is

a manageable and attractive asset to

biotech firms, allowing them to meet and

adapt to their requirements.

The selection process for partnering

with big or smaller pharma presents many

challenges; no hard and fast evidence has

emerged to enable objective assessment of

why one company should be chosen against

another as a biotechs partner of choice.

However, the fact of the matter remains

that smaller organisations can bring a

competitive and differentiated value proposal

to most biotech companies.

Enabling a biotech company to access decision-makers easily facilitates deal-making and also successful alliance management.

>>


Until testing is successfully completed, regulatory approvals are obtained and sales are made, no one can even begin to formulate an accurate valuation of

a business or asset. Even winning regulatory

approval doesnt guarantee success given the

increasing difficulty of obtaining pricing and

reimbursement approval.

Potential acquirers have thus often stopped

short of outright acquisitions. A strategic

alliance, licence, joint venture or option to

buy at a future date are often preferred.

Where a buyer is brave enough to acquire

a business outright, the price will normally

be linked in some way to the future success

of the relevant product. Amounts paid up-

front at the point of acquisition might reflect

only the value of the physical assets (such

as premises and stock) actually acquired,

some compensation for sunk cost, plus an

element of hope value. This will be the case

regardless of whether the acquisition is of

shares in a company or of a bundle of assets

and related IP rights.

Earn-outProbably the most common way of

protecting buyers from overpaying and

ensuring that sellers do not undersell is

an earn-out. The final price of the business

is linked to and contingent on its future

financial performance. While the concept is

simple enough, the practical issues are more

complex. Once a seller hands over control

of its business to the buyer, the seller can

only rely on contractual terms to ensure that

In any proposal to sell or license an early stage pharma or biotech business or product, valuation will inevitably be the most important and most difficult issue. Products under development and testing may carry high hopes and have the potential to deliver significant revenue. Nevertheless, estimating their worth can be tricky.

By Patrick Duxbury and Kevin Jones, Wragge & Co LLP

the buyer does everything it can to make

the business a success. Similar issues arise in

licences, which are often structured on the

basis of an, often modest, upfront payment,

with milestones and royalties payable if the

product is successful. For early stage deals

these terms are increasingly back ended.

The licensor has to rely on often vague

provisions obliging the licensee to use its

commercially reasonable efforts to develop

and commercialise the product.

There have been a number of disputes in

relation to allegations of failure to comply

with diligence obligations for example,

GSKs dispute with Biota, and Napos dispute

with Salix but few have resulted in a

successful outcome for the licensor.

Last years English High Court ruling in

Porton Capital Technology Funds and others

v 3M UK Holdings Limited and one other

3M company graphically illustrates that an

earn-out in an M&A deal does not always

produce the desired result. Expectations on

both sides of the deal can be far too high.

The case also illustrates the dangers of relying

on the common contractual compromise

whereby the buyer cannot take certain steps

without the sellers consent, which is not to

be unreasonably withheld.

The BacLite caseA prototype diagnostic assay for detecting

MRSA in hospital patients, developed by

Acolyte Biomedica Limited (Acolyte), is an

edifying example. The product, called BacLite,

used technology based on the activity of the

About the authorsPatrick Duxbury is a Partner and Head of

the six-partner Life Sciences sector team at

Wragge & Co LLP, delivering a unique mix of

regulatory, antitrust, IP, corporate and dispute

resolution advice to the sectors key players.

T: +44 (0) 121 214 1080


Kevin Jones began as a trainee some years

ago and is now a Partner in the Corporate

team at Wragge & Co LLP. He focuses on two

sectors: life sciences, where he advises biotech

and pharmaceuticals companies on M&A

and fundraising, and creating investment

structures for investments in real estate.

T: +44 (0) 870 730 2823


Lessons from litigation

>>


adenylate kinase enzyme. Its unique selling

point was that it produced results much more

quickly than most of the other test methods

then available. Molecular testing (PCR) could

produce results in a matter of one to two

hours but was expensive compared to other

available test methods. Using the other

methods meant getting test results might

take anything up to 72 hours. BacLite aimed

to produce a result within five hours at a

price far below that of PCR testing.

Following clinical trials, BacLite was

approved for sale throughout the European

Union. It was sold to a small number of

hospitals (the key target market) in the UK. By

2006, 3Ms healthcare business had become

aware of BacLite.

The acquisition3M hoped that BacLite could also be sold

successfully in other major markets, such

as the rest of the EU, the US, Canada and

Australia. It accordingly offered, through a

UK subsidiary, to acquire Acolyte for an initial

price of 10.4 million. The deal also included

an earn-out offering further consideration

equivalent to 100% of revenue from

worldwide sales of BacLite during 2009, to

a maximum of 41 million (less incentive

payments to the sales force). The sale took

place in early 2007.

Of course, both buyer and seller knew

that the earn-out might ultimately produce

payments far lower than the maximum,

dependent as they were on how successful

3M was in selling BacLite. The seller was,

quite understandably, not prepared to leave

that success to chance. The sale agreement

included undertakings that 3M:

would actively market BacLite and

diligently seek regulatory approval for

its sale in the US, Canada and Australia;

would apply the same marketing support

and other resources to BacLite as to its

other medical products and remunerate

its sales team on the same basis as other

product teams;

would not cease developing and

marketing BacLite without the consent

of the seller, which shall not be

unreasonably withheld.

3M, for its part, negotiated a proviso that

it was not obliged to conduct its business in a

manner that increased the payments due to

the seller under the earn-out.

Cracks appearNot long after completion of the sale,

significant problems began to emerge. 3M

had planned to have regulatory approval for

worldwide sales within six months of the deal

being concluded, starting with the US. It had

incurred considerable costs in establishing

new facilities for testing and manufacturing

BacLite. But the clinical trials in the US

produced consistently much worse results

than the sellers UK trials. The UK trials had

regularly produced detection success rates

of 95% or above. The US trials produced

success rates of only around 50%. The

evidence suggested this was caused by:

a different comparator being used in

The UK trials had regularly produced detection success rates of 95% or above. The US trials produced success rates of only around 50%.

>>


the test process, in order to check that

BacLite had successfully detected MRSA,

on the assumption, which turned out

to be unfounded, that BacLite would

not otherwise gain US Food and Drug

Administration (FDA) clearance, and;

US laboratory procedures differing in

some critical respects from those found in

the UK, especially in relation to the length

of storage of samples and incubator

temperatures.

The only market in which 3M had actually

sold BacLite was the UK. But in October 2007

the UK government announced that MRSA

screening would become mandatory for all

elective hospital admissions as from 2008.

This policy change obviously meant that a

high number of tests would be required in

every hospital. It was therefore equally clear

that, in most cases, hospitals would probably

be driven to buy the cheapest available test

products. With speed of result sacrificed to

cost, BacLites mid-range product would be

far less attractive.

There was some limited success in selling

BacLite in the rest of the EU and BacLite

was approved for sale in Australia. But in

the meantime, predictably enough, 3Ms

competitors had not been idle. Further

developments and improvements meant

that BacLites traditionally more expensive

rivals were becoming cheaper. The market

for BacLite was consequently in danger of

disappearing entirely.

The seller maintained that 3M had neither actively marketed nor diligently sought the required approvals for BacLite.

Crisis pointBy March 2008, 3Ms senior management

had been alerted to the escalating problems

of launching BacLite in the US and Canada.

FDA approval was still a long way off. Testing

and attempts to obtain regulatory approval

for launch in the US and Canada were put

on hold. Some members of the EU sales

team were re-assigned to other products.

However, the expert evidence at trial led the

court to conclude that approval could have

been obtained (on the basis of testing of

BacLite with its original comparator and by

introducing stricter laboratory procedures) for

product launches in Canada by October 2008

and the US by February 2009.

In July 2008, 3M requested consent from

the seller to close down Acolyte in exchange

for a payment of just over US$1 million. This

was said to represent a calculation of likely

sales in 2009 from where the business was at

that point. The seller refused, demanding the

maximum earn-out payment of 41 million

in exchange for consent to the business

closing down. 3M argued that this refusal

meant that the seller was unreasonably

withholding consent to closure, in breach

of the sale agreement. The seller, however,

maintained that 3M itself was in breach of

the sale agreement because 3M had neither

actively marketed nor diligently sought

the required regulatory approvals for BacLite.

Negotiations continued over a number of

months but no settlement was reached. 3M

took the unilateral decision to close Acolyte >>

?


at the end of 2008. There were therefore

no sales of BacLite in 2009 and thus no

payments under the earn-out.

To courtThe court was left to unravel the competing

claims and to decide what, if any, amount

was due to the seller under the earn-out.

This involved a trial stretching over a total of

23 days between June and October 2011,

evidence from 20 witnesses, including five

experts, reams of written evidence and a

judgment running to 65 pages.

The court ruled that:

From March 2008, 3M had ceased

diligently seeking regulatory approval in

the US and was thus in breach of the sale

agreement.

From various dates in the period from

June 2008 to February 2009, 3M stopped

actively marketing BacLite in the EU, the

US, Canada and Australia, also in breach

of the sale agreement.

The sellers refusal to consent to the

closure of Acolyte was reasonable. The

seller was not required to balance the

commercial problems faced by 3M

against its own interest in receiving the

maximum possible earn-out payment. It

was for 3M to prove unreasonableness

(for example, because the refusal was

due to some ulterior motive on the

sellers part) and it had failed to do so.

3M was therefore in breach of contract

and liable to pay damages to the sellers.

But for the earn-out protection provisions

contained in the sale agreement, it might

have been a reasonable commercial decision,

on the facts, for 3M to abandon BacLite even

earlier that it eventually did. But whether

or not it was reasonable for the seller to

withhold consent to the closure was a legal,

rather than commercial, question.

The court thus had to determine what

amount of damages the seller should receive.

This involved estimating (on the basis of the

evidence produced) what the sales of BacLite

would have been in 2009 had 3M complied

with its obligations of actively marketing

and diligently seeking regulatory approval.

The sellers were awarded just over US$1.25

million, little more than 3Ms original offer,

and far adrift of the 41 million maximum

payment contemplated in the sale agreement

and demanded by the seller.

Lessons to be learnedUnfortunately, even the best contractual

drafting cannot always fully protect

contracting parties. This is especially so

where the contract tries to control what a

party will and will not do in distant future

situations that cannot be entirely foreseen

when the document is signed. Some

commentators have suggested that the

obligations regarding active marketing and

diligently seeking regulatory approval were

far too vague. The court found that actively

market meant more than just servicing

existing customers, but not necessarily much

more. Diligently seeking was interpreted

as meaning reasonable application, industry

Even the best drafting cannot always fully protect the parties, especially where the contract tries to control what a party will and will not do in future situations.

>>


and perseverance not an especially high

standard. The sale agreement should perhaps

have spelled out in much greater details the

steps 3M would be required to take.

However, the judge himself recognised

that it would be very difficult to specify any

particular standard of care appropriate to a

task such as obtaining regulatory approval.

There can be legitimate differences of

judgment as to what steps are required in any

particular situation.

HindsightWith the benefit of hindsight, perhaps the

seller might have stipulated at the very

least that the test process should not be

altered without its consent. But then no

doubt the issue of whether or not a refusal

of consent was reasonable would have

arisen again. Maybe both the seller and 3M

should have been more alive to the possibility

that consistent laboratory procedures were

essential for success. Could the parties have

agreed on a list of essential trial parameters,

such as consistent storage times and

temperatures? Doing so might have saved a

great deal of money and might even have led

to a successful product launch. This would

clearly have been a far better result for buyer

and seller alike.

Using inputs rather than outputs can

produce a more certain outcome, for

example obliging the buyer/licensee to spend

a certain amount of money on advertising

and promotion, to engaging a certain

number of sales representatives and so on.

However, these can only really work where

the product is close to being approved for,

or is already on, the market. For early stage

transactions, it is difficult to get a buyer/

licensee to accept clear obligations to do

certain specific things by specific dates given

the inherent risk in the development process

this explains the few successful claims for

breach of diligence obligations by sellers and

licensors.

For early stage transactions it is difficult to get a buyer/licensee to accept clear obligations to do certain specific things by specific dates given the inherent risk.


In April this year, Novartis applied for judicial review of a decision made by four UK NHS Primary Care Trusts (PCTs). The case relates to Novartis drug, Lucentis,

which is licensed in the UK for treatment

of wet age-related macular degeneration

(AMD), a condition that leads to loss of

eyesight. It is the only treatment for the

condition recommended by the UKs National

Institute for Health and Clinical Excellence

(NICE). Roches drug, Avastin, is a chemically

similar medicine and is licensed only for the

treatment of bowel cancer.

Due to the chemical similarity between

the products, Avastin can also be used

for treatment of wet AMD, but has not

been tested for this use in clinical trials or

otherwise approved for this use. Novartis is

challenging a policy, approved by the PCTs,

to allow healthcare professionals within their

jurisdiction to offer patients a choice of either

Avastin or Lucentis for wet AMD. This policy

was primarily motivated by cost Avastin

costs about 60 per injection compared with

740 for Lucentis.

High stakesNovartis has defended its actions by citing

concerns for patient safety. Although not

yet announced at the time that Novartis

filed its action, the results of the first year

of an NHS-funded trial of the use of Avastin

in 610 patients with wet AMD has shown

that Avastin is just as safe and effective as

Lucentis. Nevertheless, Novartis claims that

use of Avastin carries greater risks for patients

The use of a chemically similar medicine for a condition for which it is not licensed has led to a legal challenge. The judgement may set a precedent that will have important consequences for pharmaceutical companies supplying the UKs National Health Service.

By Talitha Shkopiak, Taylor Wessing

because the manufactured dose (directed

to the treatment of bowel cancer) must

be split by pharmacists into smaller doses

before it can be administered for macular

degeneration. Novartis also claims that the

number of patients in the study is too small

properly to analyse potential side-effects.

The financial stakes in this case are high

the NHS has the potential to gain significantly

from the off-license use of Avastin, and

Novartis has the equivalent potential to suffer

financially. The case is also likely to set a

precedent for the ability of pharmaceutical

companies to challenge the off-label use of

medicines by the NHS.

Unlicensed and off-label medicines

have always been used to some extent by

healthcare professionals. However, the matter

has been brought into the spotlight recently

by a number of high profile cases, and is

likely to remain so as pressure on public

funds increases. Several developments in this

area are expected over the next 12 months;

below we consider the issues, impacts, and

perspectives of the various participants.

Marketing authorisationIn general, it is illegal to sell a medicine in the

UK unless it has a marketing authorisation.

Marketing authorisations for the UK can

be issued by the Medicines and Healthcare

products Regulatory Agency (MHRA) or the

European Medicines Agency.

Regardless of the authorising body used, a

marketing authorisation will only be granted

for a medicine that has been assessed as

About the authorTalitha Shkopiak is an Associate in Taylor

Wessings Intellectual Property group and

specialises in advising on transactional and

commercial matters, especially those with a

significant intellectual property element. She

has particular experience acting for clients in

the life sciences and university sectors.

T: +44 (0) 20 7300 7000


The balancing act of unlicensed and off-label use


meeting the required standards of safety,

quality and efficacy. The assessment of

efficacy is in relation to at least one named

indication, and the company applying for the

marketing authorisation (MA) must provide

clinical data demonstrating such efficacy.

Demonstrating efficacy for more than

one indication will usually require additional

clinical studies at significant associated

expense. Therefore, it is common for an MA

to be sought for the single indication that

provides the biggest market for the medicine.

The label used in connection with an

authorised medicine will state the indication

for which the medicine is authorised and any

other restrictions, such as age limits of the

target population.

All medicines that have been granted

an MA can be referred to as licensed.

However, a licensed medicine may be useful

for indications or in populations (such as

children) in addition to those stated on the

label. Any use of the medicine for such

purposes is referred to as an off-label use

through necessity for example, where the

medicine has not been tested in children but

there is no licensed alternative, or where it

becomes apparent through the accumulation

of experience and data relating to the

medicine and similar medicines.

In any event, the safety and efficacy of

the off-label use has not been assessed by

an authorising body and therefore, arguably,

presents higher risks for the patient. However,

healthcare professionals will weigh the risks

and benefits of prescribing an unlicensed

medicine or an off-label use of a medicine for

a particular patient. In doing so, healthcare

professionals in the NHS have a duty to make

the best use of public resources: cost as well

as clinical suitability and product quality are

required to be considered when choosing

appropriate treatments.

The NHS viewThe NHS has a limited pot of money for

use in purchasing from an almost unlimited

number of treatment options. Off-label

prescribing by healthcare professionals has

the potential to provide cheaper access to

medicines for the NHS, partly because many

medicines that could be beneficially used

outside of their licensed indications are older

medicines without patent protection.

NICE is a non-departmental public body

funded by the Department of Health (DoH),

whose role is to help ensure that NHS funds

are effectively spent. The DoH evaluates

medicines and other medical treatments

and produces evidence based guidance

for use by the NHS as to which treatments

provide the best quality of care and value for

money. NICE recommendations, although

not binding on health professionals (who are

free to make their own decisions regarding

treatment of patients), are expected to

be taken into account. Where a medicine

has been recommended by NICE, PCTs are

required to fund its use by the categories of

patients specified by NICE. Where a medicine

has not received NICE approval, it is available

at the patients (or insurers) cost, or at the

discretion of the local PCT. Each PCT must

balance its budget against the varying needs

of patients, which can create differences in

the treatments that various PCTs are prepared

to fund.

Advice for doctorsNICE does not issue guidance on the use of

a medicine until after it has been granted an

MA and will not appraise a medicine outside

its licensed indication. In a departure from

this traditional role, in October 2011, NICE

announced that it would provide advice

on the use, in special circumstances, of

unlicensed and off-label uses of medicines.

This advice will not be formal guidance

but is intended to be a summary of the

available evidence to inform decision-making

by healthcare professionals; NICE will not

provide a yes or no recommendation on

the use of unlicensed or off-label medicines.

In May 2012, NICE advised that it expected

the first such evidence summary to be issued

in the summer of this year.

The NHS has the potential to gain significantly from the off-license use of Avastin, and Novartis has the equivalent potential to suffer financially. >>


The General Medical Council (GMC) is the

independent regulator for doctors in the UK,

whose purpose is to protect, promote and

maintain the health and safety of the public

by ensuring proper standards in the practice

of medicine. Part of the statutory role of the

GMC is to provide guidance to doctors on

medical ethics. The council requires doctors

to comply with the standards of good

practice set out in its guidance.

The most recent guidance on prescribing

medicines, including unlicensed and off-label

medicines, was issued in September 2008.

The current guidance provides that doctors:

i) may prescribe unlicensed medicines but

must be satisfied that an alternative,

licensed medicine would not meet the

patients needs; and

ii) may prescribe medicines for purposes

for which they are not licensed (off-

label) but must be satisfied that it would

better serve the patients needs than an

appropriately licensed alternative.

In both cases, the doctor must be satisfied

that there is a sufficient evidence base and/

or experience of using the medicine to

demonstrate its safety and efficacy.

In 2011, the GMC held a consultation

on an update to that guidance. The draft

revised guidance provides that doctors

must usually prescribe licensed medicines

for their licensed uses, but may prescribe

off-label or unlicensed medicines if there is

no appropriately licensed alternative available

or the doctor is satisfied, on the basis of

authoritative clinical guidance, that it is as

safe and effective as an appropriately licensed

alternative. Thus, the draft revised guidance

provides more freedom to doctors to

prescribe unlicensed or off-label medicines.

The GMC consultation asked for feedback

on this broadened scope. Of the respondents,

70% supported the proposed changes,

with 20% disagreeing and 10% not sure.

However, notably, the MHRA and the

Association of the British Pharmaceutical

Industry (ABPI) opposed the change. As a

result, the GMC obtained legal advice on

the relevant provisions of the EU Directive on

medicinal products for human use.

On the use of unlicensed medicines,

the advice confirmed that they could be

prescribed only where there was a special

need and this did not include use where

there was a licensed alternative (whether

or not publicly funded). As a result, the

GMC has stated that it intends to revert to

its existing guidance on use of unlicensed

medicines. In relation to the use of medicines

off-label, this is not explicitly covered by

the EU Directive and the GMC has advised

that it is seeking further advice. The revised

guidance is expected to be published in

September 2012.

The pharma viewIn early May 2012, the ABPI issued a press

release stating that the health and safety

of UK patients should always be paramount,

and all other considerations, including cost,

must be secondary.

In its statement, the ABPI reiterated that

use of unlicensed medicines put patients

at risk and should be strictly limited to

those occasions where there is no licensed

alternative. The ABPI did not explicitly refer

to the Lucentis/Avastin case but did refer to

the risk introduced where medicines used

off-label are reconstituted and delivered to

the patient in a different way than originally

intended. The same arguments against use

of unlicensed and off-label medicines have

also been taken up by the European Alliance

for Access to Safe Medicines, a patient

safety campaigning group backed by the

pharmaceutical industry.

The pharmaceutical industry argues that unlicensed and off-label use creates a disincentive for pharma companies to do the expensive work required to obtain a marketing authorisation.

>>


A further argument advanced by the

pharmaceutical industry against use of

unlicensed and off-label medicines is

that such use creates a disincentive for

pharmaceutical companies to undertake

the significant a

issue 18 august 2012 business development & licensing...

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