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Business Development & Licensing Journal For the Pharmaceutical Licensing Groups

Interface between Industry and Academia

Cultural Aspects

Pharma Negotiator Style

Boomerang Deals

Biosimilars

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Why has out-licensing becomepopular for Big Pharma?

Pharma companies need a rich portfolio to ensure asteady flow of product launches which are able toreplace products going generic and to providegrowth for the company. With increasing costs perproject and with unfavourable attrition rates,selecting the right project portfolio is one of the mostimportant top management tasks. In this decisionprocess, top management tries to find the rightbalance between long-term ambitions andshort-term profit requirements, between salespotentials and development risks and betweenindication specific focusing and expanding thecompany’s future scope.

In this process of prioritising projects it is quitenatural that specific projects get “de-prioritised”because the data are not as good as expected,because the strategy has changed, because thebudgets are not available anymore or because salesexpectations have decreased. In the good old days,Big Pharma simply discontinued such projects andhad thrown them in the bin. Nowadays, underincreasing profitability pressure, many companieswant to exploit the value of these projects. Althoughthe de-prioritised projects may not receive a highpriority by the respective Big Pharma’s topmanagement, smaller companies may see thisdifferently.

What are the options for out-licensing?

In general, the following five main options can beconsidered when Big Pharma wants to out-licensede-prioritised projects:

• Complete divestment against a cash payment

• Straight out-licensing with standard upfront,milestone and royalty structure

• Creation of a NewCo around a project with anequity stake

• Granting regional licensing rights by establishinga co-development/-marketing partnership

• Out-licensing with boomerang options afterachievement of clinical or developmentmilestones

These concepts represent different financial returnson a risk-adjusted basis. If a company, for example,divests all project assets it may get a higher paymentat signature but does not benefit from sales viaroyalties in case the project gets approval andbecomes a blockbuster. A lot could be said about thepros and cons of the different out-partneringconcepts. Here I want to focus on the last concept,the boomerang concept.

When is a boomerang conceptattractive for both parties?

With the boomerang concept, the bigger companylicenses all rights to a certain project to a smallercompany which then becomes fully responsible forthe further development of the project. A classicsituation would be a phase I project which a BigPharma company does not want to develop furtherdue to other priorities. A Biotech company (oranother smaller Pharma company) is given the rightto develop the compound until clinicalproof-of-concept in a phase II or IIa program isachieved. When this clinical proof-of-concept or anyother specified milestone in the developmentprogramme is achieved, the originator has the rightto buy back all or regional rights to the project onterms which are either already pre-defined or haveto be negotiated during a tight option period.

Such a concept can be of interest for Big Pharmawhen the project is in a field of strategic interest andwhen the decision to out-license is mainly based onbudget restrictions instead of scientific assessments.For the Biotech company such a concept is of interestwhen it has a clear strategy to focus on increasingvalue of clinical projects, when it does not want toestablish its own sales and marketing capacity andwhen it has relevant indication-specific expertise inclinical development.

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by Dr Ulrich S Koch,Bayer Schering PharmaAG

Negotiating boomerang dealsOver the past years I had the pleasure of negotiating a number of out-licensing deals which includedoptions to take back the projects concerned after specific clinical development criteria were met. Someof these collaborations were significantly re-negotiated after the initial signing. In this article I willsummarise the concept of these out-licensing deals as well as the lessons I learned prior, during andafter the deal making process.

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What lessons did I learn innegotiating boomerang deals?

I would like to highlight the following eight lessonsI learned prior to, during or after negotiatingout-licensing contracts with buy-back options:

1 Concept helps overcoming internalresistance to out-partner

No company easily gives away a project which laterturns out to be successful. The subsequent success ofsuch a project could demonstrate that the originalprioritisation of internal project options may havebeen a questionable decision. Although suchpotential assessments are only possible with thebenefit of hindsight, they still sometimes represent ahurdle for out-licensing decisions. A deal withoptions to take the project back at a later stage canhelp overcome this resistance. With new datagenerated by the licensing partner, internal portfoliopriorities may change and the project may get newstrategic support, even if this turns out to requireadditional financial resources. In such situations,boomerang deals can be great options to facilitatefurther investments into technologies or compoundswhich do not survive the internal prioritisationprocess.

2 Data transfer requirements should not beunderestimated

The ongoing support from internal experts isespecially important when it comes to the transferof data to the partner. Any potential conflictsregarding the quality, speed and completeness of thedata transfer after the deal was signed should beavoided from the start. This issue is often morevirulent when the project has already been sitting onthe shelf for some time and the original project teammembers are no longer available. In any case,organizing a complete data transfer is no easy task.Especially when a project is de-prioritised, sufficientenergy must be re-allocated. On the other hand, itcan be easier to handle the data transfer for aboomerang project than for classical out-licensingdeals as not all data may have to be transferred untilthe results of the next development step are availableand a decision on the boomerang option is made.

3 Agreeing on a development plan is asimportant as agreeing the financials

In most licensing contracts, agreement on thedevelopment plan is a crucial part of thenegotiations. In an out-partnering project with aboomerang concept this aspect becomes even moreimportant. If Big Pharma wants to retain the optionto get the project back, the definition of the eventtriggering the option right is crucial. It should beclear from the start which new data, in whichindication, generated with which trial protocol needsto be available before the option period begins.Disagreements regarding the development planshould be clarified before the deal is signed –otherwise the collaboration will most likely run intoserious problems at a later stage.

4 End of phase II is likely to be the triggeringevent

For Big Pharma it would be ideal to let the Biotechcompany develop the project until the end of phase

III and decide to buy back the defined regional orglobal rights if the phase III data are convincing. Butsuch a concept is rather unrealistic. Due to the highcosts involved, VCs are reluctant to finance a fullphase III program. For the VC and the Biotechpartner, this trigger point could be a completedisaster if the relevant study fails to meet itsendpoints. VCs are therefore less likely to carry sucha risk. It is more realistic to tie the option rights tothe availability of clinical proof-of-concept data. Ifthe Biotech partner has followed the clinicaldevelopment plan, such data are sufficient to requesta decision by the Big Pharma partner. For the VCfinancing the development costs, such a conceptallows an attractive return on investment, as thebudgets required for a phase I and phase II programare manageable compared to the development risksand the value creation in case of success. For theoriginator, clinical proof-of-concept can also be veryattractive. Getting pre-defined options for a projectwith clinical proof-of-concept data is already a luxurysituation for the Big Pharma partner. Most otherexternal opportunities available for licensing don’thave clinical proof-of-concept data when a decisionhas to be made.

5 High upfronts cannot be expected

In most situations in life you cannot have your cakeand eat it too. This is the same when negotiatingboomerang deals. If Big Pharma wants to keepoptions to take the project back when new datahave been generated, generally, high upfrontscannot be expected. In general, there will be anupfront but it will be at a lower level. The Biotech orthe financing VC will always argue that they investrisk capital into the project in order to create valuefor both companies. It may be difficult to get internalapproval for a deal with little upfront. But if BigPharma’s main interest is a high upfront paymentthen other out-partnering options are moreattractive and should be chosen. Similarly, the furthermilestones and royalties have to leave sufficient roomfor a third party in case the originator does not wantto take back the project. If three parties want tobenefit from the project, then the share for eachparty is necessarily smaller than if only two partieswant to benefit.

6 Concept is an attractive model for VCs

My experience has shown, that a boomerangconcept can be very attractive for VCs. From theirperspective the concept can even be ideal: they haveto pay little upfront, they get a compound developedwith Big Pharma standards and they only need toinvest limited development funding to achieveclinical proof-of-concept. In case they candemonstrate clinical efficacy, they increase the valueof the project significantly. Additionally they alreadyhave a partner who may be willing to take theproject back within a foreseeable time frame.Furthermore, if the Big Pharma partner does notwant to take back the asset, the whole company canbe sold offering an attractive exit for the VC.

Over the last years I have seen several companiesemerging which concentrated on a specificindication and built their portfolio on projectslicensed from Big Pharma. These companies usuallyfocus on clinical development activities with a CROand try to utilise their partner’s research, CMC andmanufacturing capacities for non-clinicaldevelopment activities. Key challenges for such a

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biotech company are to establish detailed expertisein the selected indication area, to assess the riskprofile of the opportunity wisely and to decide on aclinical trial programme which can generatemeaningful and convincing results at a reasonablecost.

7 Negotiating terms for the return of rightscan be tricky

The most interesting part of negotiating aboomerang deal are the terms under which theoriginator can buy back rights when the defined newdata become available.

Critical questions are:

• What data have to be available?

• Within what time frame can the originator of thecompound decide to exercise the definedbuy-back options?

• What territorial rights will be granted?

• What will the financial terms be for the buy-backrights?

In order to generate sufficient room for speculation,the VC and the Biotech will often try to keep thefinancials the buy-back rights open. In case theBiotech is not willing to agree on terms,right-of-first-negotiation or right-of-first-refusal canbe agreed instead. A good number of the partnershistorically accepted pre-defined terms withmilestones and royalties. In other projects, the detailsof the buy-back rights can be the most critical aspectof the negotiations. If a potential partner does notaccept pre-defined terms and does not accept aright-of-first-refusal, a stepwise process could be asolution. In this process, after the failure of initialnegotiations, the Biotech company could be allowedto solicit offers from third parties which is combinedwith the right for the originator to place a secondbid. This second bid could only be rejected if anindependent auditor determined that the third partyoffer was substantially better. Although this processmay seem complicated, it may satisfy the interests ofboth parties.

8 Biotech company will try to re-negotiatelater

As outlined above, a boomerang deal is normallydone with reasonable financials and/or with rights offirst negotiation in case the originator wants to takethe project back. This is the price for the normallylow upfront payable by the Biotech company forreceiving a license to the technology. Under theseconditions, it is likely that the Biotech companywould be able to generate better terms with a thirdparty than with the originator or could improve thevalue of the company if the rights of the originatorwere terminated. It is therefore understandable thatthe Biotech company may start re-negotiating thedeal prior to the availability of the new datatriggering the option rights. The originator should beprepared for this. In case the project becomes lessattractive over time from a strategic perspective, itmay be beneficial to accept such re-negotiations andto agree on better terms for a straight out-licensingof the compound.

Conclusion

In my opinion, out-partnering deals with boomerangconcepts can be very attractive for both partiesbecause they meet both parties’ specific interests.The Big Pharma company does not have to invest inthe project anymore but keeps option rights in casethe project generates positive clinical results. TheBiotech company gets access to compounds in earlyclinical development on reasonable terms and hasalready prepared a financially attractive exit in casethe trials are successful. I therefore assume that wewill see more such deals in the future. Gainingexperience in negotiating such deals will improve theskill set of every licensing manager – on both sides ofthe table.

Finally, it should be noted that the number of newchemical entities getting approval is currentlydecreasing year by year. Some projects might havereached registration but were put on the shelf at BigPharma because the projects did not get sufficientpriority due to low sales estimations or due tounacceptable business risks. This model ofout-partnering may be able to get more of suchde-prioritised projects developed, submitted andmarketed. Such an effect would not only bebeneficial for the patients suffering from a lesscommon disease but also for the pharmaceuticalindustry which gets often heavily criticised for onlyconcentrating on financially attractive developmentprojects.

Business Development & Licensing Journal

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Dr Ulrich S Koch has 25 years of experience inthe pharmaceutical industry and has worked inMarketing, Sales, Strategic Planning and BusinessDevelopment in Germany, the United Kingdomand the United States. He is currently Head ofGlobal Licensing at Bayer Schering Pharma andbased in Berlin, Germany. Ulrich is also foundingBoard Member of the Pharma Licensing ClubGermany.

Email: ulrich.koch@kiez.net

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