Pharma-Biotech Licensing Trends To Watch For In 2021
Executive Summary
More option deals, greater use of alternative remedy clauses and aggressive diligence of assets. Geoffrey Spolyar, special counsel at Cooley, spotlights some of the changes he is seeing in pharma and biotech partnership agreements and explains why these trends matter in 2021.
Geoffrey Spolyar, special counsel in Cooley’s life sciences and corporate partnering practice, spends his time negotiating and drafting corporate partnership agreements, licensing arrangements, strategic alliances, joint ventures and other complex technology transactions. He has a special focus on biotech to pharma deals.
Prior to joining Cooley, Spolyar was senior counsel at Amgen where he represented the company in a number of strategic alliances including its joint venture with Astellas Pharma in Japan and its collaboration with AstraZeneca for several of Amgen’s inflammation programs.
Spolyar is expertly placed to observe and analyze patterns occurring in pharma and biotech deal-making. In a recent conversation with In Vivo, he highlighted four evolving partnering trends across the life sciences sector. Spolyar also explained more about what is driving these changes and why industry leaders should be paying attention.
1. Option Deals Are In Vogue
While a standard immediate license agreement will see pharma companies pay a substantial upfront payment to access technology or assets from a biotech partner, with attached milestone and royalty payments, more companies are now opting for option deals. With an option agreement, work usually continues on the asset by the licensor (mid-size pharma or biotech). The licensee company (big pharma) pays a smaller upfront sum to lock-in an exclusive license and exercise the option at a later date, with a more significant payment at that time.
Spolyar said there were a couple of drivers behind the uptick in option deals seen in 2019 and 2020. “The research and development P&L of big pharma is always an issue. They have tight budgets on a program by program basis. If a big pharma pays $20-$30m as an option fee, that doesn’t hit the P&L line for R&D. From an accounting perspective, it can be beneficial for big pharma not to take on the development program and to leave the R&D work at the start with the licensor.”
Historically, option agreements allowed pharma companies to place more bets without a heavy impact on their own R&D budget, but the current trend toward more option deals is being driven by advances in technology, Spolyar believes.
Biomedtracker data also shows an increase in option deals in recent years, with more than 100 agreements in 2020 compared with 75 deals listed in 2019. There were also 10 deals agreed in 2020 that included an option to acquire the partner company outright.
“The industry is seeing a real growth in new modalities, new areas and cutting-edge technology,” Spolyar said. “These aren't areas necessarily that the large pharma licensee has expertise in. If you're doing a small molecule deal or antibody deal, there's not as much rationale for doing an option deal. But a lot of these new technologies are not tried and proven. It is a stretch for a large pharma to pay $100m upfront on untested brand-new technology.”
Spolyar said companies were using option deals to buy more time and knowledge. “Big pharma can say ‘We'll pay you this money, you'll continue to do research, we'll get our foot in the door on this new technology and see where it goes.’” He added, “Some of these technologies will work out and some won't. But they've got their fingers now in more pies, so to speak.”
While licensee companies are seeking multiple option deals in the same therapeutic space, they are tending to spread their bets across different modalities. “You can see large pharma companies taking two or three different approaches to the same target now,” Spolyar noted. He added that cell and gene therapy was a technology area that had experienced an increase in the number of option deals over the last couple of years. He cited a recent agreement between Bristol Myers Squibb and Molecular Templates Inc. as one example.
BMS agreed on 11 February to pay Molecular Templates $70m upfront in a discovery and development collaboration to address specific cancer targets using the latter firm’s engineered toxin body technology (ETB) platform. Molecular Templates could realize more than $1bn in earnouts under the deal; near-term, development and regulatory milestones could reach as high as $874.5m, while the biotech could earn up to $450m in sales milestones as well as tiered royalties.
Under the agreement, the Austin, TX-based firm will conduct research to discover ETBs against multiple targets selected by BMS, including one that has already been designated by the pharma. BMS will hold options for global development and commercialization rights to each of the ETB candidates resulting from the research.
Molecular Templates went public in 2017 via a reverse merger with failed cancer biotech Threshold Pharmaceuticals, Inc. Since then, the company has inked partnerships with Takeda Pharmaceutical Co. Ltd. in multiple myeloma and with Vertex Pharmaceuticals Incorporated on optimizing stem cell therapeutics.
There are limitations to option agreements though. “Big pharma gives money to the biotech company to continue researching the program. While there will be a research plan for the licensor to follow, the big pharma company doesn't have real control over that program,” Spolyar highlighted. “Big pharma gives up that control in order to get the benefit on the P&L.”
Looking ahead, Spolyar said there needed to be more success stories based on option agreements. As pharma becomes more comfortable with the outcomes of these types of partnerships, they will continue to increase. “As that cultural sensitivity or concern about losing control lessens, then I think we will see more option deals going on.”
2. Increased Use Of Alternative Remedy Clause
In an agreement between both parties of a licensing agreement, material breaches can occur. There are two options to remedy this situation - fix the problem or terminate the agreement. Putting aside dispute over whether a material breach has occurred, historically the remedy has been to terminate an agreement and potentially sue the offending party for any direct damages or retain the partnership but claim for damages in the interim.
The other option open to companies, when a material breach has a large impact, is to activate an alternative remedy clause. Potential material breaches could include knowingly infringing intellectual property, or in a research agreement, for example, it could be not paying the agreed share of costs. However, material breaches can be hard to prove.
“Alternative remedy clauses have been around for a while, but the frequency with which these are being requested has picked up in my experience,” said Spolyar. The clause can allow a licensor to retain an agreement after a material breach, claim for damages and cut future payments related to the deal.
How these clauses play out has been “all over the map,” Spolyar noted. “Sometimes you will see pharma being extremely aggressive in what it asks for … Another wrinkle in change in this pattern is we are much more often seeing a specific percentage reduction [on future payments].”
So, where is the push for these types of remedy agreements coming from? Spolyar believes a few successful cases have spurred copycat requests. “It happens in this industry that there are situations where somebody is successful in getting some clause like this, or some other odd clause here or there. Then it gets picked up and people notice it. I would imagine that is what's happened here over time. The big pharma folks have started to ask for, and some have gotten, these clauses and that then starts to feed on itself.”
Spolyar noted this action had become more common in the deals between big pharma and private biotechs, though this kind of detail is not usually made public in the terms of a deal.
“I have seen a shift in the deals marketplace,” where more licensors are asking for alternative remedy clauses, Spolyar said. He added that there had been a change in the nature of these clauses as well, stipulating specific payment reductions of 50% in light of a material breach. This was more concerning, he said. “We don't always know at the outset what material breach we're talking about. So how do we know 50% is the right number?”
3. More Aggressive Diligence Of Assets
Biopharma deal-making has surged in recent years. Even with global disruption caused by the COVID-19 pandemic, the industry saw a record-breaking year for deals and financing activities in 2020. Another trend Spolyar identified in big pharma and biotech deals is more aggressive IP diligence. “Big Pharma is really getting much more involved in looking at the patent landscape,” he said.
This is affecting earlier stage deal-making, particularly in breakthrough technology areas where the IP landscape is not well-defined. Alongside the deeper IP scrutiny, Spolyar noted it was having a knock-on effect for the increased use of reps and warranties in agreements. “Big pharma is trying to shift responsibility to the licensor for IP issues that might crop up in the future. That has been a bit of an issue, because the small party licensor knows just as much about what's out there as the big pharma. That's a risk you take when you license an early-stage platform.”
Spolyar noted that traditional small molecule or antibody deals had a more obvious patent diligence approach. “The technology on how to make antibodies, how to make small molecules, it's well laid out. But when you're talking about new platforms like cell therapy or gene therapy, right now it’s just way out there as to what's going to stick on patents and what patents you might need to access.”
Spolyar said the increased use of reps and warranties around IP made for a lot more negotiation between licensor and licensees. However, while diligence efforts are more aggressive in his view, big pharma will still have to take the risk when it comes to future, unknown IP risks. “The big pharma licensee will have to acknowledge that it is not going to get strict liability from the licensor. It can't be a situation in which the licensor is losing money because the licensee has to eventually go out and secure third-party IP.”
Still, big pharma is trying to get more comfortable with the IP landscape around novel technologies. “The reps and warranties are really a diligence tool … forcing the licensor to sit down and disclose as much as possible and to have a very thorough conversation about the IP landscape,” Spolyar explained.
4. Rigorous Demands For Amendments To Upstream Agreements
“Academic institution license agreements have become more challenging over time,” Spolyar explained, adding that certain clauses are being requested by academic institutions in their deals with biotech and mid-size pharma licensees. These limitations can cause issues when biotechs go on to strike deals with big pharma partners.
“The problem is that pharmaceutical start-ups do not have a ton of influence over the deal on day one. IP is one of the key drivers for the company – and may be foundational to it,” Spolyar said. He explained that academic institutions will often “push hard on certain types of clauses.” The focus is not usually on financial clauses. “It's not about the royalty rate, it's how the royalty rate may be determined. It's not about development milestones, it's more about if there isn’t progress for the program to a certain stage.” Academic groups are now asking for the rights to pullback programs that do not progress quickly enough, or they are seeking limitations on sublicensing rights. “These are non-financial clauses that big pharma really doesn't like.”
Spolyar said he was seeing more cases of biotechs having to renegotiate details in agreements with academic groups in order to secure a big pharma licensing deal. “Academic institution agreements have morphed over time and there are a larger number of clauses that big pharma doesn't like. And what I’m seeing more and more is that in advance of signing a deal with the smaller entity, the licensee is saying, ‘You’ve got to go back and fix this.’”
Spolyar said it was important, during discussions with groups like academic institutions, that start-ups and mid-size companies consider which clauses could impact later partnering agreements. “It's really about identifying those provisions that will impact future licensing deals.”