Pharma Focus Asia

International Strategic Alliances

Positioning the Asian biotechnology company

Stephen M Sammut, Senior Fellow, Wharton Health Care Systems and Entrepreneurship and Venture Partner, Burrill & Company, USA.

Asian biotechnology companies’ lack of experience in pharmaceutical alliances can be quickly overcome by deliberate preparation, careful identification of potential partners and anticipation of the due diligence process of partnering.

Strategic alliances and partnering between biotechnology companies—at all stages of their development—and established pharmaceutical companies have characterised the biotechnology industry since its inception. Many companies in the U.S. and Europe have accumulated the experience in developing relationships, executing transactions and delivering completed projects and products. Those that are successful, follow a plan of analysis and preparation that serves as a model for companies new to the field. Asian biotechnology companies are largely new to the culture of pharmaceutical alliances. The lack of experience can be quickly overcome by deliberate preparation, careful identification of potential partners and anticipation of the due diligence process of partnering.

Partnering: Issues and challenges

If there is a common thread in the 30-year history of the biotechnology industry, it is that strategic alliances between companies for R&D, marketing or both have been a consistent source of funding, diversification and growth. Each year some 400 to 500 partnering transactions occur within the industry. But this is perhaps a mere 10 to 15 percent of all the opportunities promoted by more than 8000 biotechnology companies globally. As the proliferation of biotechnology companies in Asian countries continues, and as their technology develops, the number of prospective deals will increase dramatically. There are thousands of business opportunities in a year for any pharmaceutical company. Are the winners and losers separated solely by technology or commercial factors? There are companies that have projects not quite ready for partnering while many others would be appealing to partners with better positioning and planning. Asian companies have additional challenges that, with the right thinking, can become advantages.

Putting assets into the global context

Good managers and their scientific colleagues know what their companies have, but often they do not place that within the broader context of the interests of the markets, the clinical perception of needs, and the universe of activity in their area of work. The process of establishing the context requires the management team to step back, engage in a little humility, and ask critical questions:

  • Are we at the stage of development that we think we are?
  • To what extent are we free to operate and in which geographies?
  • What companies are working in this area (use published reports, patent studies)?
  • Where does the project fit into the“global” pipeline?

Forming the context is the critical foundation of determining how a project can be appealing. For Asian companies targeting US or European partners, this context requires profound understanding of the regulatory and reimbursements frameworks operating in those geographies. Historically, the US has been accepting high pharmaceutical prices. Current trends are to the contrary and over the coming decade there will be significant pressure on pricing and reimbursement. The major companies will be dramatically reassigning their own strategic interests.

Defining and identifying prospective partners

Having established a context, the difficult work begins in targeting specific prospective partners. All too many firms make a decisive error in broadcasting their projects too widely with obvious consequences: shifting of the emphasis from quality to quantity; dilution of management time; curious but no serious responses; and failure to identify and target the correct pathway into what would have been the most promising of companies means that the project will fall through the cracks.

What are some of the best practices in identifying, targeting and approaching a prospective partner? To understand best practices, do two things: place yourself in the position of the management and scientific staff at your target, and work backwards. Put another way, look at role playing as a way to get ready and then imagine that you have been successful in forging an alliance with a given company and asking yourself how and why we were successful.

Research and role playing

The role playing dimension can be revealing, but not unless some homework has been done and answers to the following are available: the product lines and pipelines of prospective partners; the number and commercial characteristics (such as general financial terms, sharing of responsibility, and exclusivity or non-exclusivity) of the deals that they have announced over, say, the previous two years; the internal structure and composition of their business development teams; their decision making process; their transaction process; where announced, the general economic and commercial structure of the deals that they have done; the general time frame of the process; and history in co-managing projects.

Obtaining historical information is a tall order. Consider where such sources might be and how to get to them. At a biotech company business development professionals attend almost every scientific and industry conference but this isn’t the effective deployment of human resources. Scientific staff of a company is an extension of the business development team and generally welcome training and networking at conferences outside their peer group. Everyone in the organisation is a source of partnering intelligence. Every prospective partner being studied and profiled will have unique attributes, but the typical commonalities are:

  • In most instances there is no substitute for data, but this does not mean that pre-clinical or Phase 1 projects are disqualified from consideration. Of course most pharmaceutical companies would prefer to in-license drugs with a New Drug Application (NDA), but there are far too few of these around. In fact, of the 500 deals announced annually, the majority are pre-phase III and earlier.
  • Projects received on a personal basis or through a respected referral get better attention than those sent blindly.
  • Internal review at the prospective partner is done on a matrix basis among a mix of scientific, clinical, regulatory, manufacturing, market, legal and transactional staff. The role of the business development professional may range from a coordinating function at one end to a key champion and decision maker on the other.
  • Patents are exclusionary rights and allow the owner or licensee only to restrict other parties from infringing on the claims of their patent. In many instances, particularly in the biotech and pharmaceutical industries, there are aspects of discovery, enabling technologies or production that are the property of other parties, which in turn have the right to exclude others from use of these claims. Any licensee will determine if they need rights to other patents that are needed. These reviews are known as “freedom to operate.” Companies will often have their own FTO studies generated by their own counsel. Any freedom to operate an intellectual property study done by a prospective licensor will pale in comparison to the one done by a prospective licensee.
  • In most instances, the process is measured in many months to a year or more, unless there is the rare circumstance of an auction of a valuable new technology.
  • Several stages of management approval are generally required—deals can fall apart at each step.
  • At any given time, your deal is just one of possibly dozens under consideration suggesting that you must monitor where your project falls into the strategic priorities of the prospective partner and whether those priorities are changing or not.
  • Confidentiality is a critical concern for both parties.
  • The financial consideration on the part of the prospective partner is the tip of the iceberg for them. More important are the internal resources that they will have to invest in managing the relationship and collaborating on the project. In the not too distant past, the distance and time differences between east and west were alone major factors in discouraging interaction. This is clearly no longer the case, but an Asian company that can demonstrate its own capacity and skill in managing collaborations will automatically be at an advantage.
  • Partnering activities on both sides are resource intensive, but the stakes are often dramatically asymmetrical and remain focussed on growing the business at the same time.

Learning from working backwards

What is “working backwards?” Simply stated, you describe to yourself a (reasonable) dream deal and imagine that the ink on the contract is dry. How did your company get to that point? Almost certainly you realised success by walking through an intensive gauntlet of due diligence. Success is a function of anticipating the range and depth of due diligence and having a full portfolio of information to satisfy the most rigorous of reviews.

Your first experience with due diligence will be as informative to you as it is to your prospective partner. Detailed profiling of the team and demonstration as to how and why they fit each task can be the first step in this direction. In the Asian setting, companies (and venture investors) often find it difficult to do the indepth analysis of management backgrounds. This is not to suggest that there is inherent mistrust, but in the U.S. and Europe, it often seems like everyone knows everyone else in the industry. Hence, it becomes imperative for you to be prepared with extensive professional references. Clear statement of your business model with an informative executive summary as to why you are seeking a partner need to be developed. This model should also cover the other aspects like co-marketing, reserve rights in specific countries, manufacturing, etc. Organise the material in a meticulous logical framework and cross-check the evidence of your own assertions.

Conduct internal due diligence relating to specific and achievable scientific and clinical milestones with detailed corresponding budgets for each phase. Be prepared to make a solid case as to why the milestones are appropriate as well as demonstrate why these coincide with value infection points. Develop a strategy for regulatory and intellectual property rights that would look at regulatory issues and patent issues from your would-be partner’s point-of-view. Finally, sketch out the respective roles that your team and your partnering team will perform.

By far, the major concerns of a prospective pharmaceutical partner are managing intellectual property rights and regulatory issues.

Intellectual property due diligence

Intellectual property remains the cornerstone of the pharmaceutical and biotechnology industries. In the U.S., Europe and Japan, there is vast, accumulated experience going back three decades on IP issues in partnering. Many Asian companies are relatively new to the landscape of IP issues and will have to prove their ability in managing and using IP. A list of items for the preparation of the same is given in ‘Intellectual Property Due Diligence Package’.
Intellectual Property Due Diligence Package

  • Identification of all patent filings and dates.
  • Establishment of clear ownership title or documented licensing rights.
  • Identification of relevant publications or uses (clinical trials).
  • Description of how patent claims cover the product or product candidates.
  • Patent term extensions or adjustments.
  • Record of maintenance fees, liens, security interests or encumbrances.
  • Articulation of the intellectual property strategy and the basis on which decisions were made.
  • Countries selected and why; schedule and deadlines for “National Phase” filings under the Patent Cooperation Treaty (PCT).
  • Identification of all product candidates.
  • Identify alternative/non-patent avenues to exclusivity.
  • Opinions related to validity, enforceability or scope.
  • Freedom to operate.
  • Identification of any alleged infringement by your company.
  • Receipt of notice letters, cease and desist letters, threats.
  • Third party infringement.
  • Invention disclosure forms.
  • Employee agreements/non-compete agreements.
  • Confidentiality/Non-Disclosure agreements.
  • “Exit interview” system—this is a common practice in the U.S. and Europe. In these interviews, employees are reminded of their agreement with the company as to IP and they will have to sign documents that they are carrying any documents, notebooks, research materials etc. Currently, there is an awareness that scientists and engineers have extraordinary employment mobility (particularly in India) and this causes prospective partners major anxiety with respect to your technology as well as their own that may become part of the work relationship.
  • Any sponsored research agreements or research and collaboration agreements.
  • Trade secrets—not what they are but in general terms what they cover, why you have chosen that strategy, and the steps you have taken to secure trade secrets.
  • Internal IP audit protocol.

Regulatory issues

The second most influencing factor in the pharma and biotech industries is the regulatory issues. Regulatory issues determine the feasibility of the project and hence it is highly imperative for you to carry a due diligence on the same. Regulatory issues in this regard include disclosure of the use of a clinical research organisation and its role in your clinical development, which is a must-be-stated fact. Prospective partners will spend considerable time conducting separate due diligence on the CRO, even if it is an internationally known company. Your regulatory due diligence should include all the items mentioned in ‘Regulatory Due Diligence Package’.
Regulatory Due Diligence Package

  • Good Laboratory Practices (GLP) and Good Manufacturing Processes (GMP) as reviewed and certified by drug regulatory national authorities.
  • Sourcing of raw materials, intermediates and capital equipment.
  • Animal use certifications (although not clinical trials per se, this may be a subset of GLPs and an audit will likely be part of the regulatory review process) conformance with all applicable national requirements and/or World Health Organisation standards for clinical trials and human subjects.
  • Exhaustive description and justification for the number of patients in each phase.
  • Thorough and documented review and approvals by human subject review boards (in the US these are know as Institutional Review Boards or “IRBs”).
  • Documents and procedures for informed consent.
  • Identification of all product candidates and all clinical indications.
  • Classification of these as: New Chemical Entities (NCE) New Drug Formulations (NDF), Pediatric, orphan drugs or vaccines.
  • History of regulatory management to date.
  • Description of clinical trial sites and reasons for selecting them; profile of all clinical investigators and their history in conducting trials.
  • Chart of pre-clinical, clinical and/or marketed products.
  • Status of all regulatory agency reviews and approvals.
  • “Orange Book Listings” if in the U.S.
  • Applicable generic entry/Abbreviated New Drug Applications (ANDA) for generics production in the U.S. or outside the U.S. filings with the US-FDA or similar filings with the regulatory agencies in other countries.
  • Manufacturing facility inspection certificates and approvals.
  • Are there potential “off-label” uses and how these will be monitored and managed
  • Approaches available for post-marketing surveillance.

Other business models and commercial issues

Generally, there are varying levels of concern about your business models and commercial plans. Prospective partners will have their own ideas which may differ considerably from your own. Nevertheless, you should have a well-documented explanation and justification for your position. These issues also form the basis for the economic negotiations in the licensing discussions and the amount and pace at which funds will flow from the partner to your company.

The foremost issue is to position your company in the value chain from discovery to distribution and the role you play in this position in terms of development and manufacturing. Second issue can be costs and pricing. This includes forecasted cost of goods across geographies and target markets; breakdown of cost of labour versus cost of materials; and pricing forecasts by country markets targeted and the research that supports the estimates. Third issue is the distribution network in your country—how they work and their pricing. Fourth issue can be Intellectual property rights, risks of counterfeiting and drug re-importation. Fifth, clinical context issues; and issues in detailing to physicians; target patient population; and the costs involved therein. Finally, competitors’ response to your entry, their pricing and growth strategies should also be taken care of.

The most critical issues

It is axiomatic that most young biotech companies are in a constant sell-mode or in some instances a survival mode. Any prospective partner knows that, but it is less of a factor in negotiations than it might seem to be. A good negotiation team on the side of the smaller company can compensate for the disadvantage. There is, however, a more insidious dynamic. Do not stop asking yourself the most critical issues of all:

  • Does your asset fit well into their portfolio?
  • Do they share your commitment and vision?
  • Do they have complementary skill sets?
  • Do they have a competing project?
  • Can you work with the group that will be doing the work? In fact, do you know who the team will be?
  • What do they bring? Can the total value of the asset be increased through partnership?
  • How will the distance and cultural differences be bridged?

Once you have thought through all of the above issues and made a candid assessment of the universe of potential partners, you will be ready for the more difficult aspects of doing a transaction, but the homework will produce the highest possibilities for success and the h3est terms in the deal itself. One final caveat, however, is that deals should not be measured on the short-run economics alone. The real test of success is the probability of reaching the market with a product that offers people real health benefits. The revenues and profits will follow, and your reputation as a desirable partner will soar.

Author Bio

Stephen M Sammut
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