Josh Hofheimer J.D. Partner Sidley Austin LLP
Lauren Grau Counsel Sidley Austin LLP
Some Key Considerations for Life Sciences Companies Evaluating Collaboration Agreements
Collaboration agreements are a key strategic tool for biotech and pharma companies. Not only do such agreements provide a way to replenish thinning pipelines for Big Pharma and to leverage additional private and public capital for a partnership, but they also enable rapid discovery, early development, and scale-up of investigational drugs at a pace not achievable for either party acting alone.
Sidley Austin LLP recently advised Nektar Therapeutics on an innovative strategic development and commercialization collaboration with Bristol-Myers Squibb (BMS). In this Q&A, two of the attorneys involved in negotiating the agreement, partner Josh Hofheimer and counsel Lauren Grau, discuss the evolution of strategic collaborations and key considerations for life sciences companies considering these partnerships.
Q: How have strategic collaborations in the biotech space evolved?
A: With the advent of combination therapies, especially in immunotherapy, we may be witnessing the beginning of a paradigm shift in how collaborations between life sciences companies are structured. As such, it is time for companies to take a closer look at how to get the most value from these relationships.
Historically, life sciences partnering arrangements have been structured with three principal common characteristics: (1) exclusive license grants across a broad disease spectrum (e.g., oncology, autoimmune diseases); (2) commercial revenue sharing through a ‘net’ payment, whether as royalties on products sales or milestone payments; and (3) commercial control vesting with the licensee, worldwide or at least for major markets.
But there was a major realignment when it comes to these structures with the strategic collaboration announced on February 14, 2018, between Nektar Therapeutics and BMS. For the first time perhaps in recent memory, the ‘little’ guy (one of the larger biotechs but not Big Pharma) struck a new deal. Nektar retains ownership of its immunotherapy investigational drug, NKTR-214, an IL-2 agonist that will be tested in combination with a number of BMS products, including primarily its PD-1 checkpoint inhibitor, Opdivo (nivolumab), and Opdivo plus Yervoy (ipilimumab).
Exclusivity to BMS is time-limited by contract, not an exclusive intellectual property license, and basically tracks the joint clinical development plan in respect of the indications, tumor types, and mechanisms of action investigated by the two partners. However, Nektar retains control of pricing of NKTR-214, and books all sales of NKTR-214 worldwide. BMS receives 35% of gross profits from sales of NKTR-214, but Nektar captures top-line sales numbers plus 65% of gross profits. And Nektar received a sizeable upfront payment of $1.85 billion dollars, plus the potential for approximately $1.8 billion in development, regulatory, and commercial milestones.
From the outside looking in, this arrangement may appear quite expensive for BMS, but it is paying far less than it would to acquire Nektar (current market cap: $17.2 billion), a substantial sum for an asset at this stage of development. The monies BMS would have spent on acquisition can go toward a large-scale clinical development plan, with an aggressive set of indications. Finally, BMS will capture all sales and revenue from any BMS asset used in combination with NKTR-214—plus the 35% of NKTR-214 global profits, even those not stemming from combinations with a BMS therapy.
This combination therapy collaboration—with both sides retaining ownership of their respective contributions—enabled a unique structure and value creation for both parties.
Q: In today’s environment, what key factors should a life sciences company consider before entering into a strategic collaboration?
A: There have been several notable strategic alliances in biotech. As you consider whether this approach is viable for your business, it’s important to understand the intricacies and the steps you can take to help make such a partnership work. Maintaining your company’s independence, and its attractiveness as a highly valued going concern, are of paramount importance in any partnering arrangement. You also need to understand the scarcity value of your therapeutic asset. Immunotherapies have the potential to solve important problems for their combinants, and they can serve as backbones across many indications and mechanisms of action. If successful, they can lead to immense value creation across a broad platform. But to capture that value ultimately in an M&A transaction, the innovator must hold on to revenue, not royalties, as revenue will generate the largest multiples on an eventual sale. Of course, this is easier said than done, requiring the innovator to remain at risk longer, raise more independent capital, create its own data and commercialization strategy, and overcome the inherent risks in drug development.
Q: Are there steps these companies might take before gathering around the strategy table to discuss a collaboration agreement?
A: Engaging in thorough due diligence prior to strategizing with potential partners is critical. As noted above, understanding the scarcity value of your investigational asset is critical. Does it solve an unmet need for one or more partners? Does it fix a technical problem? Does it get the partners into the market with a proprietary asset? Does it help the partners close the gap on a competitor? Is your asset really unique in efficacy, toxicity, utility, etc.? Or, are you pushing your product on someone (never a good idea)? These are the macro-level issues that help collaborators understand the competitive landscape, and with whom they may be partnering with. On deal points, the micro, consider carefully the following: IP and data ownership, the exclusive or non-exclusive nature of the relationship, regulatory controls, the development plan, and commercial revenue sharing arrangements.
Exclusivity can be a double-edged sword in partnering arrangements. To get exclusivity, typically you must give it. This may be important if the small company innovator is worried about its partner seeding multiple mousetraps; but in the end, that may be more reflective of the scarcity and efficacy of your asset, than of any potential ill-intent of your partner. Narrowing exclusivity may also enable the innovator to partner its assets in a way that does not place all bets with just one collaborator. We would venture that time is the ultimate enemy in life sciences deals, not exclusivity, so these arrangements should be parsed very carefully to enable maximum value creation and opportunity for therapeutic success.
Q: What additional steps can life sciences companies take to get the most out of a strategic collaboration?
A: Find and maintain internal champions in both sides of an organization. This requires partners to embed themselves deeply, and to build highly functioning, trust-based relationships that put maximum value on achieving a successful outcome. To do this, both sides must lose the ‘not invented here’ mentality and acknowledge the expertise and value that each party brings to the collaboration. Of course, the contractual arrangement can support this outcome, if crafted effectively. Governance, data sharing, regulatory, and confidentiality must be structured in a manner that encourages collaboration, rather than restricts it. The same is true for IP arrangements, patent prosecution, and maintenance. And it’s important to not overlook the details, such as deadlock, escalation, decision-making authority, alliance management, liability limits, or dispute resolution. There is no single template for these transactions, but a good understanding of how to use the contractual provisions to your collective, and singular (where important), advantage can impact greatly the quality of alignment between partners.
Strategic collaborations are a vital tool for value creation in life sciences, and we’ve seen them executed with varying levels of success. The advent of new approaches to disease management, prevention, and cure through immunotherapies and combination therapies creates opportunity to reshape this very important tool, and perhaps accelerate therapeutic innovation and reallocate some of the value capture between partners.
Josh Hofheimer, J.D. ([email protected]), is a partner with Sidley Austin LLP, based in the Los Angeles and Palo Alto offices. Lauren Grau, J.D. ([email protected]), is counsel in Sidley’s Dallas office.
The views expressed in this article are exclusively those of the authors and do not necessarily reflect those of Sidley Austin LLP and its partners. This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.