Alliance Trends

Changing the Deal

How Far Can You Go & How Often

Mark Edwards Mark Edwards
Parties to biopharma alliances are willing to change their deal term substantially and often. An analysis of these changes may increase flexibility in alliance negotiations.
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The theme of the 2017 national meeting of the Licensing Executive Society was announced as “Harnessing the Winds of Change.” While this theme may have been inspired by the meeting’s venue in the Windy City, it seems apropos to investigate the role of change in biopharma alliances.

Biopharma deals change a lot. Approximately 300 deal amendments are SEC-filed each year, with 3,800 deal amendments since 2005. That’s without counting 600+ restated agreements that have been SEC-filed over the past dozen years. Based on roughly 600 unique biopharma agreements’ being SEC-filed as material to one or both parties annually, this suggests that biopharma deals are amended, on average, once every two years, and one in twelve agreements is restated over its effective period.

This shouldn’t come as a great surprise, however, as product development takes years, and a successful alliance might endure for decades. Still, given the effort and expense that goes into drafting and negotiating biopharma alliance contracts, it’s perhaps helpful to examine the types of changes that are frequently made to deals. Doing so may lead to insight as to why deal changes are made, and more generally as to the optimum trade-off between contract specificity and flexibility.

Methodology

For purposes of this analysis, we looked at how biopharma alliances change – through amendments, restatements and conditional provisions that anticipate change from the outset. With respect to amendments, we looked at the timing of the amendment relative to the commencement date of the contract to which the amendment relates. With respect to restatements, we analyzed the key terms for a subset of alliances for which both the original and restated contracts were available. Finally, with respect to conditional provisions, we analyzed the frequency and classification of several contract provisions in recent biopharma alliances versus their use in alliances a decade ago.

Specifically, for restated alliances, we analyzed a subset of 40 alliances restated between 2005 and 2012 for which the BioSci database has unredacted contracts (typically FOIA-released) for both the original and restated deals. For conditional provisions, we analyzed the frequency and classification of Right of First Refusal (ROFR), Right of First Negotiation (ROFN) and Change of Control (CoC) provisions in alliances commenced from 2007 to the present versus 1997-2006. As with most BioSci analyses, the tags to specific deal provisions included in the conditional provisions analysis are accessible directly via the links in the embedded spreadsheets. Subscribers to BiosciDB may access the full biopharma alliance from which each provision was extracted. Also, for the restated commercial alliances, there are links to Deal Snapshots for both the original and restated deals.

Our definitions of the various financial and other key terms are as follows:

  1. Deal Size – a summation of all upfront, R&D and milestone payments, including any equity or loan amounts, to be paid to the licensor;
  2. Maximum Share (“Max Share”) – the highest royalty tier, profit split and/or transfer price owed to the licensor;
  3. Upfront Cash – the license fee plus any annual payments within 5 years from signing that are not based on events (i.e. not milestones);
  4. Upfront Equity – the total payment for licensor shares sold to licensee at signing;
  5. Contingent Equity -- the total payment for additional licensor shares sold to licensee under contingent circumstances (e.g. at IPO, clinical progression, put);
  6. Development and Regulatory Milestones (“Dev/Reg”) – the total milestone amount to be paid to the licensor through launch in all jurisdictions for the first product or indication;
  7. Other Milestones (“Other”) -- the total milestone amount to be paid to the licensor through launch in all jurisdictions for additional products and/or indications;
  8. Total Pre-commercial Payments – the sum of Upfront, Equity, Dev Cost, loans, Dev/Reg, and Other milestones to be paid to the licensor through launch in all jurisdictions;
  9. Sales Milestones (“Sales”) – the total milestone amount to be paid to the licensor in the event that all specified commercial sales thresholds are met;
  10. EFR $200M – the Effective Royalty Rate (EFR) owed by licensee to licensor in the event that annual net sales reach $200M;
  11. EFR $500M – the Effective Royalty Rate (EFR) owed by licensee to licensor in the event that annual net sales reach $500M;
  12. EFR $1B – the Effective Royalty Rate (EFR) owed by licensee to licensor in the event that annual net sales reach $1 Billion;
  13. Maximum Royalty (“Max Royalty”) –the highest royalty tier owed by licensee to licensor, not counting any profit split or supply payment;
  14. Marketing Fee -- the percentage of net sales paid by licensor to licensee (typically for co-promotion or distribution services);
  15. Transfer Price -- the percentage of net sales or $/unit associated with commercial supply by licensor to licensee (may be additive to Max Royalty);
  16. Manufacturing Cost -- the percentage over Fully Burdened Manufacturing Cost (FBMC) associated with commercial supply by licensor to licensee;
  17. Profit Split -- the highest percentage of Gross Profits (GP) or Net Profits (NP) owed to licensor by licensee (may be contingent on co-dev responsibilities by licensor);
  18. Field of Use (“Field”) – the uses for which the product or technology is licensed (may be all uses, or limited by disease and/or type of product);
  19. Development Cost Reimbursement (“Dev Cost”) – the extent to which the licensee reimburses R&D costs incurred by the licensor post-signing (may be full reimbursement or co-development, in which instance licensor bears some development costs post-signing);
  20. Territory – the geographic extent of the license (may be worldwide or more limited);
  21. Role Reversal – the circumstance whereby the licensor takes on commercialization responsibilities originally allocated to the licensee;
  22. Share of Sublicensee Revenue (“Sublicensee Rev”) – the share of upfront, milestone and other non-royalty revenues paid by a sublicensee to licensee that are remitted to licensor;
  23. Right of First Refusal (“ROFR”) -- typically a right held by licensee, conditional on an action by the licensor or third party, wherein the terms of exercise are pre-determined or subject to third party equivalence;
  24. Right of First Negotiation (“ROFN”) -- typically a right held by licensee, conditional on an action by the licensor or third party, wherein the terms of exercise are to be negotiated at a future time; and
  25. Change of Control (“CoC”) -- a right held by a party to modify the alliance terms in pre-determined respects in the event the other party experiences a majority change of ownership.

Deal Amendments

As shown in Figure 1, 90% of deal amendments relate to deals signed within 10 years of the amendment date. In turn, these amendments are quite evenly split between deals commenced within the past five years and deals commenced 6-10 years prior to the amendment date. This suggests there may be a bi-modal distribution in the use of amendments: Some deals are amended shortly after signing and regularly thereafter (e.g. extension of the research term or addition of alliance targets), while other deals are only amended once the partnered program (or environment) has evolved beyond what was envisioned when the alliance commenced.

Restated Deals

Of the 40 alliances restated between 2005 and 2012 for which the BioSci database has unredacted contracts, eight (20%) involve a university or other research institution as licensor (“university deals”), while 32 (80%) involve two commercial entities (“commercial deals”). As shown in Figure 2, for the commercial deals royalty rate (including Profit Split and Transfer Price) was the most frequently changed term in the restated deal, as it changed in 23 of 32 instances (72%). Royalty rate changes were evenly distributed across deals at all stages of development at the time of restatement. Changes in milestone payments (Dev/Reg, Other and Sales) were next most frequent – in 19 of 32 instances (59%). Milestone payment changes were also evenly distributed across deals at all stages of development at the time of restatement.

Field, Dev Cost and Territory were the next most frequent changes, each occurring in approximately 25% of the restated commercial deals. Changes in Field occurred predominantly in deals restated at Phase I/II stage of development, while changes in Dev Cost and Territory were more evenly distributed across all stages of development.

There was Role Reversal in 2 of the 32 commercial deals – the Vanda/Novartis alliance for Fanapt to treat schizophrenia (restated after approval), and the PPD/Takeda alliance for Nesina to treat type 2 diabetes (restated at Phase II). While product reversion is quite common with alliance terminations, role reversal in a restated contract suggests a more nuanced and coordinated transition of the commercial function from licensee to licensor.

With respect to the eight restated university deals, four (50%) had changes to the royalty rate, and three (38%) had changes to the terms (or definition) of Sublicensee Rev sharing. For all the restated alliances, there are summaries of key changes and specific deal terms of the restated deals in the attached Restated spreadsheet. For the restated commercial deals, there are also links to Deal Snapshots for both the original and restated deal.

Conditional Provisions

As shown in Table 1, only a minority of biopharma license agreements have as conditional provisions one or more of: a Right of First Refusal (ROFR), a Right of First Negotiation (ROFN), or a Change of Control (CoC). In addition, there hasn’t been much movement in the frequency of these conditional provisions for deals commenced in recent years as compared to alliances of a decade ago. As discussed below, however, for those biopharma agreements that include such conditional provision(s), there has been recent change in the classification of the provision by the parties.

Right of First Refusal

Figure 3 shows the number of tagged ROFR provisions for alliances commenced in 2007-17 versus 1997-2006. BioSci analysts have tagged specific ROFR provisions in each of these contracts and classified each provision by the type of change to which the right pertains. These classifications are Product (e.g. new or improved product or formulation), Field of Use (e.g. additional indications currently outside the scope of the license), Territory (i.e. additional territories currently outside the scope of the license), and Other (e.g. rights in the event or asset divestiture or liquidation).

As compared to ROFR provisions in 1997-2006, recent ROFR provisions continue to be predominantly Product-based (54%), but Field of Use expansion (24%) has overtaken Territory expansion (17%) as the next most common ROFR classification. This suggests that licensees may have heightened concerns that partnered programs will evolve in unexpected ways for additional uses.

There are links to the individual ROFR provisions, as well as summaries of specific deal terms of alliances having ROFR provisions, in the attached ROFR spreadsheets.

Right of First Negotiation

Figure 4 shows an equivalent analysis of tagged ROFN provisions. As compared to ROFN provisions in 1997-2006, recent ROFN provisions are less Product-based than previously (46% versus 53%), with Territory expansion growing in frequency (37% versus 30%) relative to deals of the prior decade and relative to Field of Use expansion (16%). This suggests an effort by licensees to expand their rights from regional to global should the opportunity arise.

There are links to the individual ROFN provisions, as well as summaries of specific deal terms of alliances having ROFN provisions, in the attached ROFN spreadsheets.

Change of Control

Finally, Figure 5 shows the number of tagged CoC provisions for alliances commenced in 2007-17 versus 1997-2006. Once again, BioSci analysts have tagged specific CoC provisions in each of these contracts and classified each provision by the party impacted in the event that party experiences a change of control. These classifications are Originator (i.e. the licensee has certain rights in the event the licensor has a change of control), Licensee (i.e. the licensor has certain rights in the event the licensee has a change of control), Reciprocal (i.e. each party has the same rights in the event the other party has a change of control), and Variable (e.g. each party has certain rights if the other party has a change of control, but the rights differ by party).

As compared to CoC provisions in 1997-2006, recent CoC provisions are more Originator-based than previously (63% versus 55%), with corresponding decreases in Licensee impact (19% versus 23%) or Reciprocal treatment (10% versus 15%). Since most Originator-based CoC provisions eliminate co-development and/or co-promotion options, this suggests that licensees are increasingly unwilling to have such options extend to an acquirer of the licensor.

There are links to the individual CoC provisions, as well as summaries of specific deal terms of alliances having CoC provisions, in the attached Coc spreadsheets.

Conclusions

This analysis has shown that parties to biopharma alliances are willing to change their deal terms – both substantially and often. This suggests that negotiators may choose to spend less effort elaborating the rights and obligations of each party in conditional provisions and instead endeavor to structure a deal with the flexibility to evolve and an expectation to make changes early and often.