Executive Briefing - How to license pharmaceutical assets

Licensing is not only a mainstream activity for the pharmaceutical industry but also an intensively competitive one. Big pharma companies vie for the best opportunities, pushing up the value of highly sought after products. But how are they to know what the best opportunities are? There are literally thousands of biotech and technology companies all offering 'unique, unmissable' opportunities. This means big companies have to be very selective about which products to evaluate, and this in turn means the biotech companies must ensure that their initial presentation – which may be just 10 to 15 minutes at a bio partnering meeting – is perfectly pitched to attract the audience's attention.

In this competitive environment, it is not at all unusual for the major companies to receive as many as 1,000 product dossiers for each one that finally leads to a successful deal. This is why it is so important to make sure that licensing professionals adopt best practices – to enhance the likelihood of success and to ensure that both licensors and licensees make best use of their available resources.

an industry within an industry

Licensing started life as a means of allowing pharmaceutical companies to maximise the exploitation of the fruits of their in-house R&D, by getting other firms to develop and sell their products in markets where they had no presence. More recently, however, it has grown into an altogether much more complex activity. Pharmaceutical licensing can now be considered a major 'industry' in its own right, and one that employs many thousands of full-time professionals.

Today, even the largest multinationals are looking to license in potential money-spinners from elsewhere, especially from the many biotech and technology-based companies that are active in early-stage drug discovery and development. This of course makes good sense. Large companies' primary competitive advantages lie in the commercialisation of products worldwide and in the later stages of development, which demand compliance with good clinical and manufacturing practices. We all know that multinationals have good connections with key opinion leaders, meaning they can set up and run (as well as finance) large Phase III studies more easily.

Not so for the smaller biotechs, for which the costs and time required to run large-scale trials can be a major hurdle. Clinical trials are very often vulnerable to delays or cost over-runs, the financial impact of which can prove very troublesome (if not terminal) for a cash-strapped small company.

To borrow an over-used but perfectly apt consulting phrase, biotechs' advantages lie in their ability to 'think outside the box'. Biotech and similar small companies are cutting-edge and flexible, allowing them to explore highly original science and take products all the way through to demonstration of clinical proof-of-concept. So the alliance between biotech and big pharma is almost a match made in heaven!

Of course, the biotech industry itself is no stranger to in-licensing, often requiring access to third party technologies in order to make its products function effectively (as in the humanisation of murine monoclonal antibodies and protein delivery technologies) and to produce them more efficiently.

Biotech-biotech deals, under which companies share and combine ideas to generate new opportunities, are becoming more common, as would be expected in an increasingly mature industry. In the biotech sector companies established themselves on the back of their own science but are now looking to bring in the next generation of 'big ideas'. Biotechs are also turning to research-focused hospitals and academia in search of new assets to incorporate in their early-stage discovery programmes.

The licensing of drug delivery systems such as enteric coated pills and respiratory aerosols is well recognised as a way of enhancing the competitiveness and extending the lifecycles of pharmaceuticals. And there is now a growing level of interest in systems that can target the delivery of new products ever more precisely – using delivery vectors, vaccines and the like. These are specialist technologies developed by experts who then license their products to companies developing novel therapeutics.

Such a strategy allows companies specialising in the delivery of formulation technologies, such as SkyePharma and Elan, to succeed by offering skills and technologies not generally available within the major companies.

Another trend that has emerged in recent years has been for big pharma to enter into more complex collaboration deals with biotechs and research boutiques. These often involve some sort of shared R&D activities (possibly funded by the big pharma company via equity or contract research arrangements), but increasingly may result in an outright acquisition of the biotech organisation, (which is later to be managed as a stand-alone unit within the big pharma organisation).

The switch from licence to M&A makes sense because the primary driver behind both transactions is usually the technology available. AstraZeneca has taken this model even further, forming a large, quasi-independent biotechnology arm, MedImmune (more on which later), from previous biotech acquisitions.

science, business and everything in between

With licensing playing such a pivotal role in new product development, it is of relevance to anyone working in the pharma industry. But of course the main responsibility for this type of activity now rests with full-time licensing professionals.

To be a licensing manager requires many skills in a range of specialities. Understanding what to license and when requires a firm understanding of strategic and business development principles. Finding and persuading potential partners to deal with you is essentially a sales and marketing activity, but it also requires the ability to draft and present complex information in a way that can be easily understood by others. To do this in the context of pharmaceutical licensing means that the underlying scientific and commercial principles of the proposed deal must also be well understood. Deciding how to value the deal introduces financial modelling techniques, while negotiating the agreement calls for negotiation skills and a firm understanding of the legal issues involved.

Of course, the licensing manager will for much of the time rely on support and input from specialists from all parts of their organisation, and this in turn requires strong organisational and interpersonal skills. All in all, quite a tall order, but also the basis for a highly varied and interesting career that can be mastered by those from both commercial and scientific backgrounds.

Unlike in a standard purchasing contract, licensing partners will frequently need to work together over many years before a deal becomes profitable. For this reason, licensing, especially pharmaceutical licensing, involves a different negotiating process from activities such as purchasing, in that it can only be successful if both parties gain from it. So, at the same time as protecting their own interests, negotiators need to ensure the needs of the partner are also met – hence the rather clichéd expression 'win-win'.

Interestingly, because successful in-licensing requires a fit with a company's strategy and (at least for development products) substantial cash and HR investments, a clear consensus is required for a deal to go ahead. This means there is little to be gained from trying to 'oversell' the concept of a potential out-licence. If the product is oversold, this will inevitably become clear during the due diligence process, and the product will be rejected. And what will the licensor have achieved? Most likely a waste of its own time and resources, and the alienation of a potential partner for another asset in development. Clearly there is every incentive to provide a realistic and honest description of what is on offer – that is not to say the product should not be presented in a positive way, simply that it should not be over-hyped.

plan flexibly

Successful licensing requires a systematic and structured approach, but one that is flexible enough to respond to any serendipitous opportunities that may arise. Having a well thought-out plan in place makes it easier to quickly assess whether an unexpected opportunity can be made to work and is worth pursuing. Hence, regardless of where the actual deal comes from, be it a target partner or an unexpected source, good planning is never a wasted exercise.

think strategically

If you don't know what you want at the start, the only certainty is that you will not get it. Therefore, all good licensing starts with a strategy setting out what is being sought and why. It goes without saying that the resulting licensing strategy needs to be consistent with a company's overall corporate strategy.

For companies with marketing capabilities, the strategy should identify the products that are required to help the company meet its long-term goals in terms of sales, therapeutic and geographical profiles and so on. The plan should be constructed in a way that plays to a company's strengths and can lead towards a more logical product mix.

Typical reasons for in-licensing may be to consolidate a portfolio in an existing therapy area (for instance, adding complementary therapies to an existing range), to establish a new therapy sector to support a major product in development, to enhance ongoing R&D activities or to extend the company's geographical coverage. The plan also needs to be realistic; there is no point in agreeing a strategy that calls for the in-licensing of products that are unlikely to be available. The strategic review process will probably also identify products that have no part in the long-term picture, and which should be identified as candidates for out-licensing.

Of course for most biotech and technology-based companies, the primary objective is out-licensing. Key strategic questions include at what stage in the development process to seek a partner and what, if any, future involvement the company will have (for instance, will it continue to manufacture the active ingredient, will it share in the clinical development or even in the marketing?) As back-up compounds are usually sought by licensees of development products, there will also be the issue of what should be offered in this respect, and also what indications and geographical regions to include.

Another timely issue for small companies is to what extent they are willing to sell equity as part of a deal. Over the past ten years, around a third of all biotech deals have involved an equity element, and this proportion is rising. This type of arrangement can work well for both partners. Biotech companies can often raise far more short-term cash (which they may need to fund ongoing activities) via an equity deal than from a straight licensing agreement.

Meanwhile, the big pharma partner can capitalise the equity part of the deal (because the investment can be accounted for as an intangible asset rather than a cost). In addition, it knows that even if the licensed product fails, its equity stake may still be of value as a result of other products in the biotech's portfolio. A good example of this is the deal signed between the Australian bio-nanotech company Psivida andPfizer, which enabled Psivida to increase the value of its shares substantially (see Box 1).

Box 1

An equity deal: Psivida and Pfizer

In April 2007, the Australian bio-nanotech company Psivida, a specialist in ophthalmology and oncology, signed an exclusive research and licence agreement with Pfizer for its drug delivery technology.

The deal terms included payments to Psivida of up to $155 million in development and sales-related milestones. Pfizer agreed to pay the costs of the joint research programme, in exchange for an exclusive licence to market all the ophthalmic products developed under the collaboration, and to pay a royalty on net sales.

In addition, Pfizer agreed to invest $5 million in Psivida's shares and hold the proceeds in escrow until it can be used to redeem outstanding convertible notes. Pfizer will also invest another $5 million in Psivida common equity in the future, subject to certain conditions. At the time of the announcement, Psivida's share price rose by 56.9%.

This deal ticks all the main boxes: the small company gets a good licensing deal with up-fronts and royalties and the big pharma partner gets exclusive commercial rights. Further development is paid for (and presumably controlled by) the big pharma partner. The equity element of the deal recognises the need to manage the future value of the stock and both partners benefited from an immediate uplift in the value of Psivida's equity.

 

Sometimes, rather than raising cash by selling new equity, a company can arrange for the licensee to buy shares from existing shareholders. This can allow biotechs to offer early-stage venture-fund investors an exit without needing to sell or float the company. Novartis's agreement with Idenix Pharmaceuticals, which included elements of equity sale, licensing and options for future products, illustrates this model well (see Box 2).

Box 2

Equity + licence + option: Novartis and Idenix

In March 2003, Idenix Pharmaceuticals announced an agreement with Novartis under which the pharma company acquired 51% of Idenix's stock from existing shareholders, along with agreements to jointly develop and commercialise the biotech's core antiviral drug candidates.

Novartis agreed to pay $255 million for its equity stake, with up to an additional $357 million contingent on the achievement of certain hepatitis drug candidate milestones. Idenix also received an up-front licensing payment of $75 million for its hepatitis B drug candidates (one in Phase III and another in Phase I/II) plus an option to jointly develop Idenix's Phase I/II hepatitis C drug candidate and all other subsequently developed Idenix drug candidates.

In March 2006, Novartis exercised its option to license the hepatitis C product valopicitabine. Idenix received $25 million in conjunction with this option exercise. A further $45 million in licence fees was to be payable against the start of Phase III clinical trials. In addition, Idenix stood to receive up to $455 million in milestone payments on achievement of regulatory filings and marketing authorisation approvals for the product in the US, Europe and Japan. Future development of the product was to be funded by Novartis. Idenix and Novartis would co-promote valopicitabine in the US and each of the five major European markets, and Novartis would have exclusive rights elsewhere. However, in July 2007 further development of the product was put on hold following initial clinical trial outcomes.

In April 2007, telbivudine, one of the hepatitis B drugs covered by the agreement, received marketing approval in Europe. In September that year Idenix announced that it would discontinue all development, manufacturing and commercial activities for the product, and that the agreement with Novartis would be amended to give the pharma exclusive development and exploitation rights in exchange for a worldwide royalty.

This collaboration is a good example of how licensing arrangements can vary over time to meet the changing needs of the partners. The option agreement allowed Novartis to delay significant investment in some products until their likely value was demonstrated, although in the event the option exercised for valopicitabine proved unsuccessful (a timely reminder that it is impossible to eliminate all risk).

The original arrangement had allowed Idenix to co-market telbivudine in the US, something many biotech companies are keen to do. However, the cost and resource implications of setting up a commercial operation are substantial, and it seems Idenix realised it would achieve higher overall returns from the drug by giving exclusive licensing rights to its partner.

 

Another trend in recent years has been for the licensee to go one step further and acquire the licensor outright. This can happen in cases where the big pharma partner wants access to the entire range of research opportunities available, or where it recognises that the staff and facilities of the partner could be run as a separate research unit, as was the case when AstraZenecaacquired MedImmunelast year (see Box 3).

Box 3

M&A trumps licensing: AstraZeneca's acquisition of MedImmune

In the case of the well publicised AstraZeneca/MedImmune transaction, the pharma company originally had the option of licensing products from MedImmune, but in the event decided to acquire the US biotech business outright.

MedImmune brought with it a good pipeline of products, but also an established organisation, a proven development track record, and strong biomanufacturing capabilities. AstraZeneca recognised that MedImmune gave it quick access to an experienced team – an attractive option compared with the long lead-times, the costs and risks associated with building a business from scratch. AstraZeneca had already acquired the UK biotech Cambridge Antibody Technology and the MedImmune and CAT businesses made a good strategic fit.

The MedImmune acquisition, announced in April 2007, involved the purchase of all the fully diluted shares of the biotech for a total of approximately $15.6 billion (including approximately $340 million net cash). The value of the deal reflected MedImmune's ability to enhance AstraZeneca's stated objectives of consolidating its strategic position in the biomanufacturing and vaccine sectors.

Commenting on the deal later that year, AstraZeneca CEO David Brennan said: "Building a major international presence in the research, development and commercialisation of biologics to complement our small molecule capabilities is key to our sustained success. The consolidation of all our biologics capabilities from AstraZeneca, CAT and MedImmune into one unit immediately creates one of the world's largest biologics pipelines and establishes us as a leader in biotechnology among our pharmaceutical peers."

 

Once a licensing strategy has been formulated, it is essential to get it endorsed by senior management. This ensures that as opportunities and partners are identified, there is general acceptance at the highest levels of the company that a particular deal makes sense. Where the strategy calls for in-licensing, internal buy-in is also essential to ensure the resources required to develop and/or commercialise the product will be forthcoming. Many in-licensed products will by their nature be unbudgeted, at least for the first year, so any allocation of resources will need to be signed off by top management.

Interestingly, while the vast majority of publicly-announced deals are licensing agreements between biotech/technology companies and big pharmas, dealmakers are also busy forging pharma/pharma partnerships, many of which are never disclosed. These may include deals for products in development; agreements covering marketed products; straightforward licence arrangements; cross-licences; or collaborative ventures of the type Bristol-Myers Squibb signed last year with AstraZeneca and Pfizer (see Box 4).

Box 4

Big pharma to big pharma: BMS's collaborations

In January 2007, Bristol-Myers Squibb and AstraZeneca announced a collaboration to develop and commercialise two of BMS's investigational type 2 diabetes products, with the possibility of adding further compounds to the collaboration.

The terms of the agreement are global (excluding Japan) and include an up-front payment of $100 million by AstraZeneca to BMS. The companies have agreed on initial development plans for the two compounds. Up to 2009 the majority of development costs will be funded by AstraZeneca, but any additional development costs will be shared equally.

BMS may also receive additional payments of up to $650 million based on development and regulatory milestones for the two compounds, and potentially sales milestones of up to $300 million per product. The companies will jointly develop the clinical and marketing strategy and will share commercialisation expenses and profits/losses equally on a global basis, excluding Japan. BMS will manufacture both products and book sales.

This deal gives BMS the opportunity to maximise commercial returns from a core R&D focus, and complements AstraZeneca's established commercial position in the diabetes market.

In April 2007, BMS and Pfizer announced a worldwide collaboration to develop and commercialise BMS's anticoagulant apixaban, which was in Phase III trials. In a separate agreement, the companies also announced a collaboration on the research, development and commercialisation of a Pfizer discovery programme, which included advanced preclinical compounds with potential applications for the treatment of metabolic disorders, including obesity and diabetes.

Terms of the apixaban agreement included an up-front payment of $250 million by Pfizer to BMS, which may also receive additional payments of up to $750 million based on development and regulatory milestones. Pfizer will fund 60% of all planned future development costs. The companies will jointly develop the clinical and marketing strategy of apixaban, and will share commercialisation expenses and profits/losses equally on a global basis.

Pfizer will be responsible for all research and early-stage development activities for the metabolic disorders programme, and the companies will jointly conduct Phase III development and commercialisation activities. BMS will make an up-front payment of $50 million to Pfizer as part of this agreement. The companies will share all development and commercialisation expenses along with profits/losses on a 60%/40% basis, with Pfizer assuming the larger share of both expenses and profit/losses.

 

The main reason so many biotech deals are reported, and often with so much fanfare, is that the value of the deals concerned is material to the value of the business and so they have to be declared to meet stock exchange requirements. On the other hand, when there is no legal obligation for deals to be reported (for example, with relatively small partnerships between two big pharma companies where the value of the deal will not influence either company's share price) firms often prefer to keep quiet and keep their competitors guessing!

name your price

Asking 'How much is this product worth?' is almost like asking 'How long is a piece of string?' The answer depends not only on the product itself, but also on the size of the potential market, the competition, the strategic fit for the potential partner and the relative supply/demand for licensing opportunities of its kind. However, in recent years licensing professionals have clearly employed a more ordered approach to valuing products, based largely around the share of the overall net present value (NPV) apportioned between the licensor and the licensee.

Many large corporations such as Novartis have formulated guidelines for valuations, under which the percentage applied to the licensor varies depending on the stage of development (and hence the amount of value already generated by the licensor). In these cases, the potential sales, product costs, marketing costs and development costs are projected forward to generate a net profit line. Subtracting the licensing costs (both royalties and lump-sum payments) allows the share for both the licensor and the licensee to be calculated. An NPV figure can then be generated using whatever discount rate the company normally employs, or alternatively a cost of money rate. It is the relative share of NPV that is being calculated rather than an absolute profit, and the outcome will be to express the percentage of the total NPV received by the licensor.

A useful, but simplistic, way of visualising this process is to consider three separate activities; discovery (up to clinical proof-of-concept), development and marketing, and to allocate a third of total NPV to each. This approach permits the various parties to receive a share of profits in proportion to the amount of time/resource invested overall.

A slightly more sophisticated approach is to consider a sliding scale model in which the value delivered to the licensor increases with the asset's stage of development at the time it is licensed.

As illustrated, the licensor's share of NPV may be expected to rise from around 5-10% at the target identification stage to around 50% once the product reaches the market.

Because the value attributed to the product will also depend on its clinical profile, the spread of the likely share will increase as the product moves closer to market and the profile becomes clearer.

Typically, when a product has clinical proof-of-concept data (which is probably an ideal point at which to seek a licensing deal), the licensor may expect to secure in the region of 25% of the total, depending upon the quality of the product and market dynamics.

As a general guide such calculations can be used to set a sensible valuation on a licensing deal. Unfortunately (or fortunately, depending on your point of view), a variety of factors can cause very significant variations in the calculated value. The most important of these is the product's potential impact on the partner's own business and internal strategic objectives. The value to a potential licensee for a product that generates synergistic sales for other products in its range will be very different from one that substitutes the sales of an existing drug (perhaps providing patent protection at a time when the original product's patent has expired). This will also differ in the case of a drug that leads to attrition, and again for one that enhances the sales of existing products via co-prescribing.

In the same way that someone will pay over the odds for a 'perfect' house, companies will pay over the odds for a product that ticks all their boxes in terms of strategic need. So products offering the ideal strategic fit for the partner can command values well above the calculated norm. Sadly for the licensor, it is virtually impossible to persuade a potential partner to change its strategic needs to include the product that it wants to license out, so this element of the valuation process is largely out of the licensor's control. (Something the licensor can do, however, is make sure that its product is positioned to relate to a licensor's identified strategic need).

The second element that can cause valuations to differ from the calculated norm is the existing supply/demand for products of the type being licensed. Where there are many alternative products available for licensing, potential licensees can logically drive a hard bargain, safe in the knowledge that if one licensor walks away, other opportunities exist. However, if there are relatively few opportunities, and a queue of companies is interested in accessing them, the licensor is in the stronger position and can drive up the deal value – sometimes to stratospheric levels when big pharma companies are forced to outbid each other to access 'must have' technologies.

This is exactly what happened in the mid 1990s when it became clear that humanised monoclonal antibodies were likely to be more effective than their murine equivalents. At the beginning there were only a limited number of humanisation technologies available, and licensors of the technology were able to secure very attractive deals (including royalties of more than 3%, a very high rate for such enabling technologies). However, once the major players had all secured the necessary technology, the licensing demand fell away, and latecomers to this marketplace were no longer able to secure such attractive deals.

The same applies when a novel receptor technology is identified and proven in the clinic. The major players quickly decide that they need to secure a foothold in a potentially lucrative new market, and are willing to pay up to many multiples over the logical deal value in order to fend off their rivals.

A good example is the recently announced deal between Genzymeand Isis Pharmaceuticalsfor Isis's cholesterol lowering agent mipomersen, which had a headline value of just under $2 billion. This value reflected the advanced stage of the product, the attraction of a lucrative market and the competitive profile of the product (mipomersen is being developed primarily for patients at significant cardiovascular risk who are unable to achieve target cholesterol levels with statins alone or who are intolerant of statins). However, as is explained in Box 5, the actual deal value was not as high as the headline value implied!

Box 5

Headline value deal: Genzyme and Isis

This January, Genzyme and Isis Pharmaceuticals signed a deal worth nearly $2 billion for Isis's Phase III cholesterol lowering agent mipomersen.

The deal terms included a $175 million up-front payment, an equity investment of $150 million, $825 million in potential regulatory and development milestones, and a further $750 million in commercial milestones.

Genzyme agreed to pay a royalty based on 30% of net profits, rising to 50% if annual sales exceed $2 billion. Isis agreed to pay development costs of up to $75 million.

This particular deal is interesting because the headline numbers are so high, reflecting both the importance of the lipid-lowering market, the product's advanced stage of development, and its competitive profile within the market (mipomersen is being developed primarily for patients at significant cardiovascular risk who are unable to achieve target cholesterol levels with statins alone or who are intolerant of statins).

However, if the equity investment and future milestones are discounted, and Isis's development costs deducted, the deal is actually worth $100 million – still an excellent result for Isis, but far short of the $2 billion headline figure reported!

At 30%, the royalty rate also seems high, but crucially this is set against net profit, rather than sales. Given the high launch costs associated with a major market, it could be some years before any royalty is actually paid, although this is a good way of balancing risk and of ensuring the licensee has the incentive to invest in a strong sales and marketing campaign.

 

paying with biodollars

This is probably a good moment to introduce the concept of 'biodollars'. The numerous multimillion dollar deals that are announced give the impression that licensing is incredibly lucrative. Sadly, this is something of an exaggeration, as most 'bread and butter' deals involve the exchange of much smaller sums. In reality, a licensor with a product in early clinical development should more reasonably expect a $1 million up-front payment on signing the deal, $20-30 million in milestone payments, and royalties in the range of 8-14%. But because many quoted biotech companies wish to demonstrate to their shareholders that they are generating good value, they often structure deals in such a way that they can present high headline values.

Some clever tactics include:

• Adding in the value of any equity investment made at the same time (which may or may not be directly related to the product being licensed);
• Calculating the value of all the milestone payments that may become due (even though many of these, such as those for approval of multiple indications, may never be realised); and/or
• Adding in the value of any contract research being paid for by the licensee.

Most misleading of all, companies can include the cumulative value of royalty payments over the life of the agreement as part of the overall headline deal value – even though very few announcements actually publish the royalty rate being offered in the deal! A typical example of a deal announcement is shown in Box 6.

Box 6

A 'typical deal announcement': Rigel and Serono

In January 2006. Rigel issued a press release announcing the triggering of a $5 million milestone payment in its partnership with Serono (nowMerck Serono). The announcement included the following statement:

"On October 25, 2005, Rigel announced that it had granted Serono an exclusive license to develop and commercialize product candidates from Rigel's Aurora kinase inhibitor program. The license is worldwide, except for Japan, which Serono has an option to include at any time within two years following signature of the agreement. Under the terms of the agreement, Rigel is eligible to receive up to $160 million in total as well as royalties on any eventual product sales of R763 and other Aurora kinase inhibitors developed under the agreement. Serono will be responsible for the further development and commercialization of R763, as well as any other product candidates arising from Rigel's Aurora kinase inhibitor program. Rigel has achieved milestones for total payments of $30 million from Serono to date, including $10 million in initial payments, $15 million in equity participation and this $5 million milestone payment for the IND."

In 2007 Rigel announced that it had received a further $3 million from Merck Serono extending its rights to include the Japanese market.

Now go back to the original press release. That announcement implied that the deal was worth $160 million plus royalties, while in fact the up-front payment was only $10 million, and the subsequent milestones paid to date come to just $8 million.

Further cash was generated from an equity stake but the balance will rely heavily on royalties. As in nearly all announcements, the royalty rate is not stated.

 

While all the sources of income presented in the Rigel/Merck Serono example are certainly legitimate, when added together to produce a total deal value they can give a very misleading impression of what is actually on offer from potential partners. Companies using published deal values to benchmark the value of their own products need to be aware of this, otherwise they risk pricing themselves out of the market. And it is much better to do a deal that makes money than fail to do a deal by asking for too much.

preparing the ground

Where products are sought for inward licensing, corporate 'marketing material' needs to be prepared setting out in positive terms who you are, what you are seeking from the licence and why you are the ideal partner for the asset on offer. The company's strategic review will have identified the key product opportunities that are being sought, and this will allow target profiles to be prepared. These profiles may relate to general markets or they may include quite detailed target specifications for specific opportunities.

At this stage, desk research can yield a 'long-list' of potential targets (say up to 300 opportunities) which can then be reviewed internally and whittled down to some 15-30 priority targets. This process also stimulates a useful discussion within your company as to its priority targets, as well as which companies would make good partners and why.

In the case of outward licensing, the company needs to assemble a licensing team comprising management and individuals selected to provide key scientific and/or commercial input. The skills required for this job will vary depending on the stage of development of the product in question – for marketed products, medical, sales and marketing inputs are probably the most important, whereas for early-stage compounds, staff from chemistry, pharmacology and toxicology will be more appropriate.

The licensing team will be responsible for preparing the detailed licensing material, starting with the confidential prospectus (see Box 7). This document should encapsulate all that is known about the product (including positive and negative attributes and data) and set this out in a way that helps potential partners to clearly evaluate the product. This is the key document and getting it right can make the difference between success and failure.

Box 7

Key elements in the confidential prospectus

Many people will only review the first few pages of the prospectus, so the opening page should include a concise, half-page summary of the opportunity, including a two-line statement of what the product is, and a short paragraph stating the product's potential importance for each major therapy market. To ensure the product focus on particular markets is not diluted, no more than three therapy markets should be referenced. This page should also include licensing contact details.

Next comes a more detailed overview (ideally a single page, but no more than two) summarising the salient features (both positive and negative) outlined in the prospectus, and finishing with a positive statement regarding the product's potential value to the target audience.

The first section proper should set out the therapeutic rationale for the product. For novel mechanisms of action, this section needs to explain how the product works, including details of the mechanics and chemistry/pharmacy of the process illustrated with simple diagrams. For well understood mechanisms, this section should concentrate on how the opportunity is likely to differ from, and offer advantages above, other products that use the same mechanism.

The next section, Chemistry & Pharmacy, should provide some basic facts about the product, including its structure or other key identifiers, and details of any relevant properties such as melting point, solubility, purity and stability. This section should also outline actual or proposed formulations, manufacturing processes and overall costs. Any processes yet to be proven and any potential scale-up issues should also be identified.

Intellectual Property is the key value driver, and this section should outline the current patent position. Each key patent should include details of patent reference numbers, key expiry, submission and grant dates as well as a summary of the main claims of the patent and the overall level of protection. Other forms of IP such as Supplementary Protection Certificates, Orphan Drug Status, regulatory protection, copyright or trademarks should be mentioned, as well as any areas where additional IP may be generated in the course of further development, such as manufacturing processes.

A comprehensive review of all preclinical data should be given under a section entitled Experimental Data. This should lead the reader through the key stages of investigation (ie in vitro studies leading to ex vivo and in vivo studies) up to a postulation of likely clinical utility. Start with an opening summary stating demonstrated properties, then track through the key studies undertaken that support these, highlighting key observations (illustrated with graphs or photographs of any pivotal results). Comparative studies will be particularly important, especially if no clinical data are available.

Although Metabolism, Pharmacokinetics & Safety is strictly part of Experimental Data, it is usual to provide this under a separate section as it will be reviewed by different people during the due diligence process. This section should make it clear what safety and other regulatory data currently exists, and should include a summary of data covering any known or postulated metabolic pathways, general pharmacokinetics and either study results or a statement regarding toxicology, genotoxicity and carcinogenicity.

Where it is available, Clinical Development is the most important section of the dossier. If only limited clinical data are available, this information should be linked to Experimental Data to help build a picture of the likely overall clinical profile.

Whether studies have been completed or not, this section should set out the clinical objectives, including the target end-point for each clinical phase. For trials already undertaken, there should be a summary/review running to at least one page per key study, setting out the clinical trial protocol (a brief outline of the methodology), the results (with pivotal results illustrated graphically) and conclusions focusing on how the results add value to the overall profile. This section should close with a summary of the overall conclusion in terms of the potential competitive clinical profile and identifying any major issues that need to be addressed.

A section on the Therapeutic Potential should outline the key therapeutic areas that will form the basis of the product's commercial exploitation. This may consider fast-track niche opportunities as well as large long-term markets, but it needs to remain focused. For each market the document should explain how available knowledge points to a potential opportunity for the product, and should review the likely medical profile against known or expected competitors. Any unmet medical needs that could be treated by the new product should be highlighted, but avoid presenting general market statistics except in very loose terms (your prospective partner should already know more about the market than you do). Conclude with an up-beat one-paragraph summary of the overall therapeutic potential for the product.

A summary table outlining the product's Competitive Profile will help potential partners understand how the product will fit in the market, and should set out how the product's data sheet may look in terms of indications, pack types, safety etc.

The final section will be a list of References used, highlighting a list of key papers, full copies of which may be appended to the prospectus.

 

Once this process is complete, a non-confidential dossier and a confidential presentation can be prepared. And finally, all the supporting material that will be required as part of the full product evaluation has to be put in place. Ideally, all this information should be kept in one location: somewhere for potential partners to review the material when they undertake due diligence.

The prospectus itself should provide a clear picture of how the product works, using preclinical and clinical studies to illustrate the results. It should go on to show how the product can be used therapeutically, identifying any unmet needs that can be addressed as well as competitive advantages, so that the potential partner can use this information to prepare sales and profit forecasts.

clarity is everything

The prospectus is a 'multidisciplinary' document and will be read by people from both scientific and commercial backgrounds. As such it needs to be written so that the non-scientist can grasp the importance of what is being said, but in a way that does not trivialise the information for the expert. It is particularly important to avoid using jargon or acronyms, which may be unclear or just plain misleading. For instance, if a company says it has an NDA, does it mean that it has signed a non-disclosure agreement or that it has obtained an approval for a new drug application?

Once the confidential dossier is complete, a short (3-5 page) non-confidential document, the first piece of information provided to prospective partners, can be prepared. This needs to be concise, but it also has to provide enough information to encourage the partner to seek more information under confidentiality.

As well as reviewing the product and its therapeutic potential, this document should include a brief review of the company to let the partner know who they are dealing with and why the product is being offered for licensing or co-development.

Because you never get a second chance to make a first impression, the licensing material must do its job perfectly first time. For this reason, material should be tested on an external audience before it is delivered for real. Ideally bring in a representative group of pharmaceutical professionals who have experience in reviewing the type of product concerned, and present it to them. This will ensure that any potential issues can be identified beforehand and that the team has had experience of presenting 'under fire', which can be a very different experience from presenting internally!

The target terms to be sought from any deal, including a fallback position (below which you will walk away), should be agreed internally, as should the profile of an ideal partner. These are key elements in successful licensing because they ensure that you are clear about what type of deal is acceptable, and what you are willing to contribute in the long term.

As with in-licensing, you need to spend some time carrying out desk research, taking into account any internal feedback that is available on potential partners, in order to create an ideal partner profile. Again, the resulting long list needs to be filtered down to around 15-30 target partners.

making the call

At this stage, whether you're looking to license in or out, you will be ready to make contact with your identified targets. Always try to make a personal contact directly, whether that's by telephone or face-to-face meeting, or at a networking meeting or conference. Never rely on a letter or e-mail sent 'cold', and always be prepared to accommodate the unexpected opportunity that arises from a chance meeting at a conference or other networking activity.

And because both inward and outward licensing are very resource intensive, you should limit the number of contacts you are dealing with at any one time. It is better to spend longer on doing a job thoroughly than to talk to everyone you can quickly and fail to license anything because you haven't devoted enough attention to each potential partner.

The way in which companies manage licensing contacts is changing. A couple of decades ago, companies fostered relationships with potential partners over many years, meeting every 12-18 months to review potential opportunities. When a licensing opportunity came along, in all likelihood both sides already knew each other well, having worked together before, and as a result could move forward quickly.

However, the prominence of the biotech sector as a major source of licensing opportunities has caused all that to change. These days, there are simply too many companies and products out there to allow licensing staff the luxury of meeting everyone, and unsurprisingly other 'contact paradigms' have now emerged. Perhaps one of the best known today is the so-called 'bio partnering meeting', where biotech companies get the opportunity to meet big pharma and other biotechs (be they potential partners or competitors).

On the one hand, such meetings can be worthwhile because they bring together a large pool of potential contacts all in one place, and also provide some insights into what competitor companies are up to. Yet there is also the inherent danger that such meetings turn into the pharmaceutical equivalent of 'speed-dating', during which your great message is lost in the pool of other attractive opportunities on offer.

Don't forget that a pharma major typically receives around 5,000-10,000 potential opportunities for every 100 deals that actually emerge – so you can see this is a highly competitive activity. This is why the first contact is so important – if you can't persuade the recipient that you are presenting an unmissable opportunity for them, they probably will have moved on to the next candidate before you have even had a chance to elaborate on your ideas.

Logically, you can increase your chances of success if you speak to someone in the pharma company first, identify what it is they are really looking for, and then address these issues up front in your submission. If you can't talk to anyone, you should at least scour the company's website to gain an idea of what are key issues for them.

Big pharma remains receptive to direct approaches from licensors, although given the volume of opportunities involved, companies are now asking potential partners to formalise the initial contact, usually by submitting non-confidential material via e-mail. Pharma companies employ staff whose job it is to filter these applications through a 'triage' system, eliminating products of no interest and directing good opportunities to other staff with the skills needed to review their potential interest. So make sure your initial data hits the recipient's 'warm spot'.

For products in early development, the initial person-to-person contact is likely to take place between scientists, rather than business development or licensing managers. Most big pharma companies now employ teams of 'talent scouts' who are constantly on the lookout for novel technologies emerging in their respective area of expertise. So an initial contact with a scientist who thoroughly understands your technology can be by far the best way to initiate any licensing discussion. This process can be facilitated by making sure you present data on your products at leading symposia and conferences. It's also important to attend the smaller meetings where key big pharma scientists present, and use the coffee breaks as opportunities for networking.

the importance of being diligent

Once a partner is identified, both companies will enter a phase where product and company evaluations proceed in parallel with contractual negotiations. The most important part of the evaluation, often called 'due diligence', is the potential licensee's assessment of the product. This usually follows the four-step process outlined below:

1. Internal review by licensing teams to eliminate 'no-hopers' and to establish an interest in principle;

2. Initial internal review involving limited internal feedback to confirm that no potential issues exist. This typically involves a key contact in R&D for development-stage projects, or key commercial inputs in the case of marketed products;

3. Full internal review by all departments that need to be involved, including manufacturing, QC, safety, intellectual property, etc. This stage is very resource intensive and can last for some months, but it does result in a detailed review of the opportunity including potential costs, risks and commercial returns; and

4. A final go/no go review, factoring in any other opportunities being considered. This can easily be made once the detailed review is complete.

During the detailed evaluation process it is essential that the prospective licensee asks all the right questions. In particular, it is important to make sure that all the available data provided relate to the actual dose and formulation the product will be marketed in, and that all the experimental and clinical studies have been reviewed – good as well as bad. If any key questions remain unresolved at the end of the review process, discussions should go no further, unless the parties can agree on additional activities aimed at generating the missing data.

During the evaluation process it is vital to make sure all the appropriate internal departments are involved, including groups such as safety, production and QA. Wherever possible the process should involve staff who will be involved in the implementation of a successful deal. Generally, when undertaking a due diligence study, it is wise to work from a checklist to make sure that nothing is overlooked – you certainly don't want to end up licensing a marketed product only to find the trademark cannot be used (as was rumoured to be the case when Volkswagen acquired Rolls-Royce) or to find the product's licensed indication is being withdrawn.

At the end of the evaluation, you should have a costed project plan with the responsibilities of the licensor and licensee clearly set out, along with an assessment of both commercial and technical opportunities as well as risks. Any issues to be dealt with in the contract (as warranties, etc.) will have been identified, and internally you will have secured the full support of key staff and departments that can assist (or block) progress.

The evaluation process should also allow both companies the opportunity to decide whether they can work together. In particular, a key factor in the review process is the identification of a 'product champion' on the licensee side – someone influential who is committed to the project and who crucially will be involved in the implementation of any deal. In the absence of a product champion it is unlikely that the deal will be signed or, even worse, it may be signed but fail to deliver commercially later on.

who gets what

Legal negotiations commence with the signing of a secrecy agreement, or Confidential Disclosure Agreement (usually referred to by its acronym CDA). Commercial interest should be established by having the potential licensee indicate what it believes will be the revenue forecasts for the programme by year. This can then be agreed with the licensor so that both companies can model the likely profits to be had – if you cannot agree on likely sales forecasts with the other company, there is little point in continuing as your commercial terms will need to reflect what you both expect to happen. As negotiations progress, it can make sense to share simple spreadsheet models with your partner to help ensure mutually acceptable commercial terms.

Once serious interest is established the best way forward is to negotiate a written but non-binding termsheet. This should be about two pages long and should set out the key elements of the potential deal. These should include a clear definition of what is to be licensed – a specific product or technology, or possibly rights to use a particular patent or access to specific biological materials. Where one or more brand names or trademarks are to be included, these should be defined. The termsheet should set out a 'field' of use for the products covered by the agreement. This might be all human and veterinary therapeutic uses, or it may possibly be limited to certain therapeutic uses (although it is not generally practicable to try to restrict therapeutic uses that may be treated using the same product formulation).

The 'territory' where the licence will apply (global, regional or restricted to specific countries) must be stated. The level of exclusivity for the licensee (covering development, manufacturing and selling) must also be clearly identified.

Typical agreements include:

• Exclusive rights (ie, only the licensee can market the drug), which are most commonly applied to products in development;
• Sole rights (both licensee and licensor can sell the product, but the licensor cannot license the product to anyone else), which are often found in deals between biotechs and big pharma;
• Semi-exclusive rights (the licensor can license to someone else, but only in specific circumstances), usually in cases where there is an element of co-development; or
• Non-exclusive deals which provide no level of exclusivity at all to the licensee. These are common in cases where a company is seeking to avoid infringing someone else's patent rather than to gain any specific benefit from its use.

The termsheet will also set out any specific obligations that will apply, such as the development or commercialisation of a product in specific areas, or manufacturing and regulatory responsibilities. It is sensible to agree at this stage what law and language are to be used in the drafting and interpretation of the contract. Most importantly, the termsheet needs to set out the commercial terms that will be applied, namely the up-front payments, development milestones and royalties.

The up-front value of the deal depends very much on the product's stage of development. If it is in late-stage clinical development the value can be very high, running to tens or even hundreds of millions of dollars. For very early-stage products, however, the up-front can be very small – as low as tens of thousands of dollars – because the bulk of the investment in the product and the associated risk will have to be born by the licensee. In these cases, milestone payments will be structured in such a way that the licensor is rewarded once the licensee has been able to take the product forward and increase the likelihood of its eventual success. Typical milestone payments arise when the product obtains a CTA (allowing clinical trials to be undertaken), or at the start of Phase II or Phase III trials. For products already on the market, the licensee may agree to make a commercial milestone payment once sales exceed a particular level.

Sometimes, rather than sign a licensing deal with large milestones in the first instance, companies may choose to enter into an agreement with an 'option' that the licensee can exercise over a period of time, usually when the product profile is better understood. When the option is exercised, a large up-front payment is usually triggered. While this deal structure is not dissimilar to one involving a large milestone payment, it offers the advantage that the licensee can walk away (without legally being required to terminate the agreement) if the product proves to be less interesting than originally thought, or if the licensee is simply no longer interested. A good example is GlaxoSmithKline's 2002 deal withExelixis, which led to the conclusion of a licensing deal for one of up to three compounds in December 2007 (see Box 8)

Box 8

'Options': GlaxoSmithKline and Exelixis

The 2002 collaboration signed by Exelixis and GlaxoSmithKline covers seven compounds in addition to back-up and follow-up compounds in the Exelixis development pipeline.

Under the terms of the collaboration, Exelixis submits its seven compounds to GSK as they achieve clinical proof-of-concept (generally based on Phase II trial data), and GSK then has the option to select two compounds, and potentially a third compound, for further exclusive clinical development and commercialisation. (Exelixis retained co-promotion rights in North America).

The initial collaboration included an up-front payment to Exelixis of $30 million. Further payments will be triggered on completion of development milestones which, depending on the number of compounds involved, could range from $220 million to $350 million. Exelixis will also receive sales-based milestone payments and double-digit royalties on product sales.

GSK also agreed to provide Exelixis with a minimum of $90 million in development funding over six years and made available a loan facility to Exelixis of up to $85 million. GSK also acquired $14 million of Exelixis' common stock at a premium of approximately 100% to the then stock price.

Under the terms of the original agreement, a four-month option period began in October 2004 allowing GSK to expand the collaboration, which led in January 2005 to an amended collaboration allowing the accelerated development of the programme and including exclusive option to license up to three compounds from a range of products in development. GSK agreed to provide research funding of $47.5 million over the remaining term of the collaboration, and to purchase additional Exelixis shares at a 25% premium to the market price. Exelixis was also allowed to develop some compounds outside the collaboration by making use of third-party financing vehicles.

In December 2007 GSK exercised its option with respect to one compound, XL880, which was in Phase II for the treatment of a range of cancers, and made an up-front payment of $35 million (which was used to repay an advance made to Exelixis by GSK in 2005). The licence agreement included additional payments on the attainment of specific development and commercialisation milestones as well as double-digit royalties on product sales.

This deal worked well for both companies. GSK obtained exclusive rights to a range of new products under the option agreement, but was able to wait until the products reached clinical proof-of-concept before committing to a licensing deal.

Much of the earlier payments were made either as equity or as loans, which were used to fund the Exelixis development programme. Exelixis gained a significant boost to its share value as well as equity and loans which it used to fund its business until its products were ready for licensing.

 

The royalty component of a deal is usually expressed as a percentage of sales, and for most pharmaceutical products tends to be in the region of 5-15%. If the licensee is not planning to sell the product directly, for instance if a biotech company licenses a technology from a university to develop it up to proof-of-concept before licensing it to big pharma for commercial exploitation, a better way of handling royalties is to set a rate based on a percentage of net income. This would include any income generated from up-front payments and milestones, as well as royalties or profits from raw material supplies. In these cases, the royalty rate would be set higher, typically 2-3 times the rate that would apply to direct sales of the same product.

Sometimes (as in the case of the Genzyme/Isis deal reviewed in Box 5), a royalty rate set according to net profits can be used to help share the costs and risks associated with sales and marketing, or to reflect any concerns regarding potential gross margins on the product. Companies that license out drug delivery systems, or other technologies that are used in conjunction with a product, usually earn lower royalty rates, typically in the region of 2-6%.

However, a flat rate royalty based on sales values can sometimes go against logical reason. For instance, the same respiratory delivery device earning a 5% royalty could feasibly be used in a generic product selling for say $5, as well as in a major new innovative product selling for $200. In this example, the drug delivery company could be earning either 25 cents or $10, despite its device adding the same value to both products. In such cases, a better strategy is to set a fixed royalty per unit sold, for example $1 per device.

If the licensor is to manufacture the product or undertake any ongoing development work, a supply or research agreement will also be needed. While such arrangements are usually set out as separate agreements, the profits generated from these activities will need to be factored into the overall deal value, so they are usually included in the termsheets.

more for your money?

As mentioned earlier around a third of biotech deals are accompanied by an equity element. Typically, this involves the licensee purchasing a stake in the licensor. While technically this is not part of the actual licensing agreement, it takes place at the same time, and its value is often factored into the considered value of the deal in some way. However, it is important to recognise that a $1 million equity purchase is not the same thing as $1 million paid up front.

Equity arrangements can be attractive to both partners. As discussed in the Pfizer/Psivida example, for the licensee, it offers the opportunity to capitalise part of the value of the arrangement and reduce its risk in the project. And as many large companies such as GlaxoSmithKline and Novartis run their own VC funds, the resources needed for an equity investment may be easier to find than the additional cash needed to make up-front payments.

The licensor, typically a biotech or technology start-up, also stands to gain from equity investments, particularly when the licensing deal is being undertaken as a means of generating funds to finance the business. For one thing, a big pharma taking an equity stake in its licensor can act as a strong endorsement of the company and/or its technology. It can also act as a useful valuation benchmark for VC funds and other investors.

Another way for organisations to raise more cash early on is to securitise the royalty income stream for a particular product. This involves selling rights to a future share of a royalty stream to a third party in exchange for a cash payment. Such deals are feasible if a product is generating revenues or, possibly, if it is in Phase III clinical trials. In a recent example of this financing model, Massachusetts General Hospital sold its rights to royalties on non-US sales of the drug Enbrel (etanercept) for $284 million (see Box 9). The royalties concerned were derived from a licence deal relating to the hospital's decoy receptor technology that was used in the drug's development by Immunex (Amgen).

Box 9

Securitisation of royalties: Massachusetts General Hospital

In 1998, Immunex (Amgen) signed a licensing agreement for Massachusetts General Hospital's decoy receptor technology that was used in the development of the rheumatoid arthritis drug Enbrel (etanercept). The royalty stream arising from this agreement represented a major part of Massachusetts General Hospital's overall licensing income. In 2005, Amgen challenged the level of royalty payments, but a year later the dispute was settled with Amgen making a large payment to the hospital.

In April 2007, the hospital sold its rights to future royalties on foreign sales of Enbrel for $284 million, a move that eliminated its exposure to market risk and provided funds to help build a research endowment.

Worldwide sales of Enbrel in 2006 were $4.4 billion, including $2.9 million in the US. In addition to securing cash for current research plans, the deal also protects the hospital from market changes that could potentially cut into Enbrel sales.

As a biological material, Enbrel, which has also been approved by the US FDA to treat psoriasis, is relatively expensive and already faces competition from Abbott's Humira (adalimumab) and Centocor's Remicade (infliximab). If a small molecule with similar properties was introduced this could have a big impact on future sales.

 

'heads' up

The process of negotiating a termsheet will typically require two to three meetings, and will be undertaken in parallel to a technical review of the product. Although some companies like to formally sign a legally binding 'Heads of Agreement' document, it is usually preferable to agree the termsheet as a written, but not legally binding, document that can be used as the basis for drafting a full agreement. This is because any legally binding 'heads' will require the involvement of lawyers, potentially slowing down the process, and leading to duplication of the same activities in the drafting of the 'heads' document and the full agreement.

Although a non-binding termsheet may seem to be a less powerful document, in practice it can set a strong moral (rather than legal) starting point for the main agreement, and will set out clearly, in writing, what is expected from both sides. Often termsheets can be concluded by experienced licensing managers without the need for lawyers to be present (although they should have been briefed on what is planned beforehand). This offers the advantage of speed, allowing licensing managers to concentrate on practical rather than legal issues, which are arguably more critical at the early stages of negotiations.

Once the termsheet has been agreed, it can be used as a briefing document from which lawyers draft a full agreement. Although opinions differ, for deals between biotech companies and big pharma, it usually makes sense for the latter company's in-house lawyers to write the first draft. They usually want to work to a standardised format, while the biotech can afford to be more flexible, as long as the agreement gives them what they expect.

Importantly, this approach can lead to significant cost savings for the smaller company, mainly because it can pay its lawyers (often external) to simply review and amend what has been written, rather than drafting an agreement from scratch, hence fewer billable hours. It goes without saying that any lawyers involved must have had prior experience of negotiating pharmaceutical licensing deals and be familiar with the legal framework and language used in such agreements. This means it is better to employ the services of a specialist legal counsel, rather than the company's everyday general lawyer.

During negotiation of the full agreement, partners need to take account of any issues that were identified during the due diligence process. Typically, the full agreement will require rather more meetings than the termsheet, but it may be possible to resolve many minor issues via e-mail or teleconference.

The negotiation process should not be conducted in the same way as haggling for a better price on a rug in an oriental bazaar. If everyone starts by asking for much more than they actually want, in the expectation of being negotiated down, the process will last forever. Far better to be even-handed and to make sure the other side clearly understands any particular issues you have. Always be willing to compromise, but if conceding a point, try to offset it with a concession on something you want from the other side. Bear in mind though that this process will only work if the negotiator from the other company is in a position to make concessions. There is no point in saying: "We could make that ten if you make this six", and have the other company representative say: "Well, thank you for that – I'll see what my boss says." The boss will almost certainly come back saying: "Ten is OK, but how about four?"

Where differences of opinion make agreement difficult, don't spend time trying to force the issue. Set out clearly what the different sticking points are, suggest that both sides revisit them once they have had chance to discuss the matter with their colleagues, and try to move on to a less contentious area to get everyone back into a positive frame of mind.

Often, having discussed the problem you had with other managers, it becomes easier to accommodate the requests of your partner, or a new solution may emerge that can be proposed at the next meeting.

Often in negotiations, a number of 'difficult issues' will arise on both sides. Sometimes these can be managed by noting them all down and, at the end of the process, bringing in the key decision-makers to 'trade-off' all the issues in one last compromise agreement.

Once the bulk of the agreement is in place, it makes sense to agree to start a final meeting, and allow this to take as long as it takes to close the deal, even if it means staying on for an extra day. Certainly, never ever say you have to agree by a certain time because you have a plane to catch, as your negotiating position will be severely compromised!

signing is just the beginning…

Licensing deals have no value unless they lead to a commercial return, so it is vital to manage the implementation process. This is best achieved by using a multidisciplinary team drawn from both partners, often referred to as a 'task force'. This team (see Box 10) should have a clear understanding of each partner's obligations and responsibilities and it can help to prepare a 'plain language' summary of the contract, clearly setting out who is responsible for what, and what payment terms and milestones are included, so that everyone is clear about what is expected and what is at stake if they fail to deliver.

Box 10

The work of the 'task force'

A particularly effective means of managing collaborative programmes, as well as the transition period involved in most licensing deals, is to establish a task force. These teams should seek to allow balanced representation between the two partners, but should include only those functions required for the tasks at hand. Naturally, priorities may change over time – for instance, as a project moves into clinical development – but the representatives of both companies should always be matched (in both number and status) even when all the actual work is just being done by one of the partners. The task force should not implement any actions; instead its role is restricted to monitoring and identifying any issues that need to be resolved. To ensure balance minutes of any meetings should be written by the company not chairing the discussion, and the chairmanship should alternate between the companies. Action minutes should focus on any agreed policy decisions and on identifying who should be undertaking what activities and by when.

 

In addition, most large companies now recognise the importance of sustaining strong relationships with their licensing partners, both to progress ongoing programmes and to encourage future collaboration. Many now employ alliance managers to pro-actively manage their relationships.

And clearly, licensing projects, especially collaborative ventures, work best when the teams from the companies involved share a common sense of purpose. To this end, it can be very effective to bring together key players from both sides in a pleasant and neutral location, with the aim of 'getting to know each other' and setting out the broad activities and responsibilities for the programme (although this is often seen by senior management as an indulgence). This type of exercise can foster a sense of shared responsibility and interdependence that can pay enormous dividends as the project progresses, particularly if any unexpected problems arise (as they usually do).

When problems arise they should be resolved in a practical way and the contract should never be invoked as a substitute for practicable compromise. As soon as one of the partners brings the contract into discussions, the other side is likely to become defensive, and start worrying more about their liability than the need to resolve the problem. It is far better to concentrate on resolving issues than on apportioning blame, as without a solution, everyone loses.

When a project is going badly, or when one of the partners realises its objectives have shifted so the project no longer makes good sense, the sensible approach is to tell the other company straight away. Putting off difficult discussions merely damages the inter-company relationship (which may be important for other potential projects) and may lead to expensive damages.

In conclusion, for most in the pharmaceutical and biotech industries, licensing is now as much a mainstream activity as research or clinical development. In fact, successful licensing has become a 'skill' in itself. In the same way that companies can gain a reputation for being good innovators, or good developers, they can also gain a reputation for being good licensing partners. A successful track record in licensing, either inward or outward, will encourage potential partners to deal with you. This skill is just as valuable to a company as any sales or scientific prowess, and if used properly can have a huge impact on corporate profitability.

David Scott is an independent licensing and business development consultant. For more information email [email protected].