Negotiating “What If”
Opt-in and Opt-out Provisions in Biopharma Alliances
As co-development deal structures have taken center stage, the importance of “what if” has risen markedly in biopharma alliance negotiations. Opt-in and opt-out provisions are where dealdoers have found their answers.
The life cycle of successful biopharma alliances is long and complicated. Consider Remicade, the chimeric monoclonal antibody to TNF alpha, which has earned $100 billion over the past two decades. Remicade (infliximab) was developed by Centocor, with first human trials in sepsis in 1991. Sepsis trials were terminated in 1995, but Centocor found efficacy in Crohn’s disease and an Ex-US & Far East partner in Schering-Plough in 1998. Over the next decade, Remicade was successfully developed for five additional indications, including rheumatoid arthritis, ankylosing spondylitis, psoriatic arthritis, ulcerative colitis and plaque psoriasis.
The April 1998 Centocor/Schering-Plough co-development alliance is an early example of the importance of negotiating “what if” provisions at the outset of an agreement. Specifically, the parties included an opt out/in clause (Tag) which provided that either party could independently develop (i.e. the other party could “opt-out” of) additional indications through successful completion of the first Phase IIb trial, after which the other party could resume participation in (“opt-in” to) such indication by reimbursing 75% of the out-of-pocket costs of developing such indication. (The parties also had another key “what if” provision: a reciprocal change of control provision (Tag), which came into play when Centocor was acquired by J&J in 1999, and again when Schering-Plough was acquired by Merck in 2000. Change of control “CoC” provisions were one of several conditional contract provisions we analyzed in 2017.
To understand the importance and variability of opt-in and opt-out provisions in biopharma alliances, we analyzed approximately 100 co-development agreements having one or more opt-in and/or opt-out clauses, where both the deal structure and implications for financial consideration are known.
For purposes of this analysis, we looked at co-development alliances at any stage of development at signing which have been SEC-filed as material contracts. Since key aspects of opt-in and opt-out clauses tend to be heavily redacted (e.g. duration of opt in/out and implications for financial consideration), we limited our analysis to unredacted biopharma alliances, typically obtained through Freedom of Information Act requests. On this basis, we classified 105 biopharma co-development alliances by type of opt-in and/or opt-out clause, as well as by which party held the right to exercise such clause, the right’s duration and the financial implication of exercise. The four types of such clauses are as follows:
- Opt-out – a party has the option to terminate its co-development obligations
- Opt Out/in – a party has the option to resume its co-development obligations after prior election to terminate its co-development obligations for some stage(s) of development
- Opt-in – a party has the option to assume co-development obligations
- Opt In/out – a party has the option to terminate its co-development obligations after prior election to assume such obligations for some stage(s) of development.
As with most BioSci analyses, the deal-specific opt-in and opt-out provisions included in this analysis are accessible directly via the embedded “Tags” in the spreadsheets. Subscribers to BiosciDB.com may also access the alliance press release and full contract(s) from which these provisions were extracted by following the “Deal” link.
Opt-out Clauses are Most Common, with Either Party Having the Right to Opt-out
As shown in Figure 1 and the Opt-in and Opt-out Provisions spreadsheet accompanying this article, 46% (47 deals) of the dataset had opt-out clauses, 35% (38 deals) had opt out/in provisions, 13% (14 deals) had opt-in clauses, and 6% (6 deals) had opt in/out provisions.
Figure 2 shows the breakdown of which alliance party had the right to exercise the relevant opt-in and/or opt-out clause. Overall, either party could exercise such right in 52% (55 deals) of the instances. Either party held such right predominantly in opt-out and opt out/in instances. The licensor (compound originator) held such right in 25% (26 deals) of instances, predominantly alliances with opt-out provisions. The licensee (commercialization partner) held such right in 23% (24 deals) of instances, largely provisions for opt-in or opt out/in rights.
Implications for Financial Consideration From Exercise of Opt In/Out Provisions
As shown in the spreadsheet, an opt-out generally results in no profit sharing but a higher royalty as compared to royalties in territories or indications for which there was no co-development. An opt-out followed by a subsequent opt-in typically requires development cost reimbursement (either the opt-out party’s share or all incurred costs), plus a premium on such reimbursement, most often 2x the opt-out party’s cost share. An opt-in clause at the discretion of the licensee generally requires a cash payment at exercise, plus development cost reimbursement (both FTE and out-of-pocket costs) leading to a profit split. By contrast, an opt-in clause at the discretion of the licensor typically provides for cost reimbursement on an out-of-pocket basis, plus foregoing of prospective milestone and royalty payments in favor of a profit split. Finally, an opt-in followed by a subsequent opt-out generally results in no profit split, but a higher royalty as compared to territories or indications for which there was no co-development expenditure prior to termination.
Top Pharma is Licensee in 55% of Co-Development Deals with Opt-in and Opt-Out Provisions
As shown in Figure 3, the 16 Top Pharmas were licensees in 55% (58 deals) of co-development alliances analyzed. Other licensee categories were represented as follows: 13% (14 deals) involved Mid Tier Pharma licensees; 11% (12 deals) involved one of 14 Major Biotechs as licensee; 6% (6 deals) involved Japanese Pharma licensees; and 14% (15 deals) involved another biotech as licensee.
Figure 4 shows the frequency of opt in/out clauses in co-development deals licensed to Top Pharma and Mid Tier Pharma, respectively. Co-development deals licensed to Top Pharma were fairly evenly divided between Opt-out and Opt Out/in clauses. By contrast, co-development deals licensed to Mid Tier Pharma more frequently contained Opt Out/in clauses versus Opt-out provisions.
Discovery Stage Co-Development Deals Use Broadest Range of Opt In/Out Clauses
Figure 5 shows the frequency of deals in the dataset by the most advanced stage of development at deal signing. Discovery stage alliances are most frequent at 33% (35 deals), followed by Phase II stage at 19% (20 deals) and Phase III stage at 17% (18 deals). For these three subsets, Figure 6 shows that Phase III stage co-development deals predominantly utilize Opt Out/in clauses, while there is a broader distribution of Opt In/Out clause types for both Phase II and Discovery stage deals. Discovery stage deals were 60% (21 deals) Opt-out, with the remaining 40% distributed fairly evenly among the other three Opt In/Out clause types.
Recent Deal Trends Show More Opt In/Out Rights Being Held by Licensor
Finally, we divided the dataset into four time periods having approximately 25 deals each. This resulted in the most recent and oldest subsets extending over much longer periods as compared to the two interim periods. As shown in Figure 8, there hasn’t been much variation in the type of Opt In/Out clause most frequently utilized – Opt-out and Opt Out/in clauses continue to be about 80% of all such provisions. However, as shown in Figure 9, there has been a trend in recent years for such right be held by the licensor (compound originator), as opposed to the licensee (commercialization partner) or either party.
Co-development has become a prominent feature of biopharma alliances in recent years. This has changed the risk/reward profile of each party profoundly – both with respect to the trajectory to first product launch, and thereafter for life cycle management of a successful alliance. Opt-in and opt-out provisions may play a crucial role in the pre-launch and post-commercialization phases of an alliance. As such, spending a significant portion of a deal negotiation resolving key “what if” scenarios is a worthwhile investment of both parties’ time and effort.