March 1, 2012 (Vol. 32, No. 5)

Structuring Contracts & Navigating Key Legal Issues

The FDA’s simultaneous approval in August 2011 of two new anticancer drugs, along with diagnostic tests to identify patients likely to respond to those drugs, provided fresh evidence of the emergence of personalized medicine. It also highlighted the value in personalized medicine of companion diagnostic tests that identify patients who may benefit from a specific targeted therapy.

One of those FDA-approved projects involved a collaboration between Pfizer and Abbott on the development of a drug targeting a genetically caused lung cancer (Xalkori) and a companion diagnostic test. As drug developers and diagnostic companies increasingly work together to develop companion diagnostics, it is important for life science companies and their legal counsel to understand the ways in which these companion diagnostic collaborations are structured and the most important terms and conditions of these agreements.

Diagnostic collaboration relationships often feature characteristics that differ from those in traditional drug-drug collaborations due to their scientific and business setting:

  1. The underlying drug is usually far along in development prior to initiation of the collaboration because scientists often do not discover the characteristics to diagnose a drug’s effectiveness until the drug is in or even near the end of clinical trials.
  2. The diagnostic partner faces the risk that the underlying drug may never reach the market.
  3. Development of a diagnostic test is relatively inexpensive, and the hoped-for profit margin is typically lower, as compared to drugs because diagnostic tests often have reduced exclusivity protection under patent law or FDA regulations.
  4. The diagnostic may prove useful in ways unconnected to the drug. Other tests, possibly laboratory developed tests (LDTs), may also be able to identify patients eligible for the drug.

These can change the relative risks and economics of a potential collaboration. Consequently, they may shift the leverage of the parties in the negotiations and alter the terms of the deal.

Mark A. Kass

Deal Structures and Key Terms

As a general matter, companion diagnostic collaboration agreements contain the same types of provisions found in drug development collaboration agreements.

Given the scientific and business setting of companion diagnostic collaborations, it is more common for the diagnostic developer to be treated as a service provider and the drug developer to be treated as the service recipient, rather than the two being treated as partners or collaborators. A look at some of the key terms demonstrates the tension found in companion diagnostic agreements.

> Grant of Development License

The drug developer typically licenses its background intellectual property to the diagnostic company on a royalty-free worldwide basis, solely for development of the companion diagnostic. Exclusivity is important. The license is generally nonexclusive; where there is exclusivity, it is typically coupled with flexible termination rights for the licensor or milestone requirements to maintain exclusivity. The license frequently permits the diagnostic licensee to sublicense with third parties to assist in the development.

If the drug developer actively collaborates in development of the companion diagnostic, there would be a cross-license from the diagnostic developer with similar limitations as the license from the drug developer.

> Management of the Development Process

Development is often managed through a collaborative process. Parties may assign and divide responsibilities in the agreement or leave it to be determined by a joint committee. The agreement may require that both parties agree on the development process or provide that one party has final say.

> Funding Development

Given the risk that the underlying drug may never reach the market, the drug developer commonly pays at least some portion of the development work for the companion diagnostic through a budgeted amount, milestones, or both. It has been reported, for example, that Pfizer paid certain costs for Abbott to develop the companion test for Xalkori. Where the drug developer has rights to commercialize the diagnostic, the drug developer would be more likely to pay these costs and more of them. But even where the diagnostic company will be commercializing the diagnostic, the drug company often pays some of the diagnostic development costs.

> Commercialization

These agreements generally provide a commercial pathway of the diagnostic, typically involving commercial licenses and related commercialization rights, obligations, and compensation. Sometimes the commercial terms are in the form of an option, with only basic economic terms agreed upon in advance. We see at least three approaches:

  1. The drug developer commercializes the drug, and the diagnostic company commercializes the diagnostic. There may be agreements on joint promotional activities and/or duties.
  2. The drug developer controls commercialization of the diagnostic product, by right or by option, under a license from the diagnostic developer.
  3. The drug developer commercializes the drug, and the diagnostics developer has the right to commercialize the diagnostic. If the diagnostics developer chooses not, or is unable, to commercialize the diagnostic, the drug developer would have the right to do so under license.

> Commercial Economic Terms

Where the drug developer commercializes the diagnostic, it typically pays a royalty to the diagnostic developer on sales of the diagnostic. Where the diagnostic developer commercializes the diagnostic, it typically pays a royalty to the drug developer. Given their substantial investments in the drug, drug companies generally resist attempts by diagnostic developers to obtain royalties on sales of the companion drug.

> Regulatory Approvals and Labeling

FDA regulatory responsibility is typically assigned to a party, usually the diagnostic company, but the drug developer commonly has input in the process.

Diagnostic developers often request that the name of the diagnostic developer and test be listed on the drug label to reduce the risk of competition from LDTs. Drug companies sometimes resist because they don’t want to limit alternative tests.

> Ownership of Inventions

The issue here is whether invention ownership flows from a collaboration model or a service provider model. In a collaboration model, invention ownership is derived from the source of the invention—the diagnostic company owns inventions that relate solely to the diagnostic, the drug company owns inventions that relate solely to the drug, and other inventions are jointly owned. In a service approach, the drug company is treated as having hired the diagnostic company to create the companion diagnostic on behalf of the drug company, and the drug company owns all inventions, regardless of the source.

> Other Intellectual Property Provisions

These agreements address joint inventions, patent prosecution and maintenance, indemnification for third-party claims of infringement, and claims against third parties for infringement.

> Indemnification

One sees a range of indemnification provisions, much as in other collaboration agreements—from no indemnification to cross-indemnity for product liability, and from breach of agreement, gross negligence, and intentional acts to IP indemnities.

> Termination

This clause commonly mirrors a service agreement, with asymmetrical rights. The party contracting for the service often can terminate the agreement without cause (sometimes with a requirement to reimburse the service provider), but the service provider can only terminate for cause such as breach by or bankruptcy of the drug developer. And sometimes, if the diagnostic company breaches, the drug developer can terminate the agreement in part and still retain its rights under the agreement.

Two key elements often drive the negotiation of these agreements: the parties’ view of their relationship (as a true collaboration or as a service) and the factual setting, including the timing of the collaboration, the historic and projected costs, and the extent to which the diagnostic will have patent protection or, conversely, competition.

Mark A. Kass ([email protected]) is a partner in the Global Business & Transactions and Life Sciences practices of Nixon Peabody. Web:

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