United States: The Rise of the Platform Technology Deal

As new types of collaboration appear across the biotechnology sector, the onus is on creativity in the structuring of the licensing deals that follow in their wake. Michael Lytton reports

Over the past two years, corporate partnering deals between biotechnology and pharmaceutical companies have undergone a paradigm shift. During the first two decades of the biotechnology industry, the goal of every biotechnology company was to bring forward a therapeutic product through as late a stage of clinical development as possible (ie, until the money ran out), and then to deliver an exclusive licence to this product to a large pharmaceutical company, who would then complete development of the product and sell it through its sales force. Depending on the value of the product, manufacturing rights might be able to be retained by the biotechology company, and perhaps some marketing rights in territories where the pharmaceutical company did not have a major presence.

The structure of these deals would typically include an upfront payment to the biotechnology company, sometimes in the form of an equity investment. Depending on the stage of development of the product, there would also be milestone payments due upon the achievement of certain designated regulatory objectives as well as payments upon the achievement of specified sales levels. These milestone payments would be typically back-ended, so that the biotechnology company would bear the majority of the risk of clinical failure of the drug prior to FDA approval.

Finally and most importantly, the biotechnology company would receive a royalty on net sales of the drug by the pharmaceutical company. For drugs with only early-stage clinical data, these royalties would be in the range of 5% to 8%. Deals involving later-stage candidates would provide much higher royalties, generally in the range of 10% to 15%.

During the last two years, a new type of deal has flourished in the platform technology areas of combinatorial chemistry, gene therapy, and genomics. In each of these fields, companies have developed innovative strategies for granting multiple, non-exclusive licenses to pharmaceutical company partners, permitting broad access to the information generated by their early-stage technologies.

A platform technology involves the use of biological or chemical materials to speed up the drug discovery process. Typically, platform technologies are referred to either as tool technologies (such as combinatorial chemistry libraries, cDNA libraries, or drug delivery mechanisms such as gene therapy) or target technologies (such as genomics, signal transduction or antisense).

How can a platform technology company do non-exclusive corporate deals with multiple partners involving a single technology? This is because a single platform technology allows the creation of an almost infinite range of candidate compounds and partnerable targets. For example, leading combinatorial chemistry companies such as ArQule and Pharmacopeia have made the same library of chemical compounds available to multiple corporate partners, each of which pays an access fee for the right to fish non-exclusively from the same compound pool. Depending on the deal, payment of these fees may also entitle the pharmaceutical company partner to access special directed array libraries created around a specific and proprietary chemical theme that the pharmaceutical company contributes to the collaboration. Hits from a directed array will also permit an exclusive licence for future drug development. Finally, the combinatorial companies have entered into multiple non-exclusive partnerships with biotechnology companies, who are rich in biological targets. In these cashless deals, the combinatorial companies' compounds are exposed to the biotechnology companies' proprietary targets, and the partners collaborate 50/50 on the development of any lead compounds arising from this drug discovery exercise.

In the genomics field, the explosion of targets has also permitted the rapid growth of deals with multiple corporate partners. The most successful architect of this strategy in the human genomics field is probably Millennium Pharmaceuticals, which has done major corporate deals involving more than $250 million in up-front payments, research and development fees and equity with Astra, Eli Lilly, American Home Products and Roche. The Millennium deals are impressive because, in each deal, Millennium is guaranteed between three and five years of committed research funding. Each deal is also target limited, with potential product applications in fields such as diagnostics, antisense and gene therapy reserved for Millennium's own internal development. In the pathogen field, Genome Therapeutics Corporation has adopted a similar strategy in its deals with Astra and Schering-Plough. These deals also involve significant guaranteed up-front payments ($13 million in the Schering deal, for example), as well as generous retained rights for GTC (eg, diagnostics, antisense and gene therapy).

A different approach to corporate partnering among genomics companies has been taken by Incyte Pharmaceuticals, which provides non-exclusive access via subscription to a database containing human genomic information (called Lifeseq). Incyte sells access to anyone willing to pay a fee (approximately $15 million to $20 million) for a three-year subscription; the subscribers include approximately 14 pharmaceutical companies.

In contrast to the back-ended product development deals which pervaded the biotechnology industry during its early years, these platform technology deals typically provide for about 50% of the funding up-front or, at least, on a guaranteed multi-year basis. Of course, the royalty rates do tend to be lower, typically not exceeding 5% to 7% (more on this later). As a result, the platform deals have reduced or eliminated the need for combinatorial chemistry and genomics companies to go through the traditional multiple rounds of venture capital financing. Instead, the typical scenario has become an initial founding venture capital round, followed by pharmaceutical company partnerships at a greatly stepped-up valuation.

The explosion of targets has also prompted some genomics companies previously intent on an exclusive deal approach to move to non-exclusive deals. In 1993, Human Genome Sciences (HGS) entered into the first major corporate alliance to exploit genomic information, under which SmithKline Beecham (SB) agreed to pay HGS $125 million in exchange for the exclusive right of first refusal to develop drugs from gene sequences determined via HGS's technology. In return, HGS would be entitled to royalties of 10% on any developed products with sales in excess of $100 million. However, as time went on, it became clear that there were far too many gene sequences for any one company to evaluate, much less to go on to discover and develop drugs based on this evaluation. The bottleneck is any one company's ability to determine disease relevance and biological function of an unknown gene.

The solution was to broaden access to the HGS database. In 1996, the HGS/SB partnership concluded agreements with four pharmaceutical companies (Merck KgaA, Schering-Plough, Synthélabo, and Takeda), providing them with access to the HGS database in return for upfront fees (approximately $170 million in total) and royalties. The companies may then compete with HGS/SB in determining the biological function and disease relevance of a gene which they study in the database and then go on to develop a product based on this determination upon development of a product, SB will share partial marketing rights with the successful developer.

A related development has been the great increase in the number of collaborations between biotechnology companies, which doubled from roughly 50 to 100 between 1995 and 1996. ArQule's cashless collaborations with biology companies have already been noted. In the genomics field, probably most notable has been Genetics Institute's collaboration with Chiron, Genentech and Ontogeny to share its library of unidentified, secreted proteins. Unlike the earlier big ticket genomics company deals with pharmaceutical companies, the Genetics Institute collaboration involves minimal sign-up fees and downstream sharing of commercialization rights with participants. A subscriber to the GI programme is entitled to run all of GI's proteins through its own assays. Upon the occurrence of a hit, the subscriber can choose, on a first-come, first-serve basis, to obtain an exclusive licence to the subject protein and to associated GI technology to assist with optimization.

Although such consortia have been quite common in other high-technology fields such as the computer industry, they have (until recently) been rare in the biotechnology industry. A biotechnology or pharmaceutical industry equivalent of a technology-sharing consortium such as Sematech or the Open Software Foundation would have been unheard of.

However, times have changed for pharmaceutical companies as well. In addition to opening up its formerly exclusive genomics database to other pharmaceutical companies, SmithKline has also entered into an alliance with Glaxo to share their respective bioinformatics and sequencing resources to pursue the acquisition of data on anti-microbial targets. What is interesting about this collaboration is that it is only at the very earliest stages of information collection, ie, the development of data as a starting point for a proprietary programme. Information sharing ends long before the biological target is identified.

The most recent permutation of this move towards consortia is the collaboration announced in May 1997 among Bristol-Myers Squibb, the Whitehead Institute (MIT's genomic research group), Affymetrix, and Millennium. The focus of the consortium will be on post-genomic developments. As noted above, although intensive efforts have been underway for some time by government and other organizations to sequence all of the genes in the human genome, this is only an initial step to driving the full benefit of genomics. Further work needs to be done to determine how these genes function, how they interact, and how changes in DNA sequence produce disease. The consortium will have a first look at the insights and technologies emanating from basic research work at the Whitehead Institute, an important source of competitive advantage in what may be, literally, the race of the century. The collaborators hope that Whitehead's efforts will result in a general set of tools, paradigms and approaches that will be applicable to a large range of problem-solving in the field of functional genomics.

Bristol Myers will provide $8 million a year to the five-year programme, as well as the support of a newly formed department of applied genomics composed of 60 researchers. Affiymetrix will contribute its GeneChip technology, which interprets large amounts of DNA by creating an array of 65,000 short DNA fragments. Each of these fragments answers a single question as to which DNA base is at a specific position in a piece of sample DNA. If the DNA in the sample fragment finds its complement on the DNA bound to the chip, it binds and the signal is detected and read automatically. Millennium will bring to the project its approach to functional genomics, which brings together computational and bench biology. The consortium is structured so that each company receives a protected interest in intellectual property relative to its field.

There has also a growth in the number of joint ventures between for-profit biotechnology companies and universities, such as the recent joint venture formed between Myriad Genetics and MD Anderson Cancer Center, as well as the separate legal entity established by the Columbia University Genome Center and VimRx Pharmaceuticals. In each case, for-profit companies were formed to commercialize the results of sponsored research undertaken by the University and funded by the biotechnology company.

How can the rise in the formation of these collaborations and consortia be explained as a strategic matter? The shift can be explained by contrasting the risks and rewards associated with a platform technology deal compared with a long-term product development deal. As to the latter, enormous upside (hopefully) can be generated by a single, successful deal, assuming that the drug under study actually works. Of course, this huge reward is accompanied by significant risk as well, as has been borne out by the late-stage clinical trial failures of a number of biotechnology company products over the past few months.

By contrast, platform technology companies have pursued a horizontal strategy, under which they have bargained off the upside associated with a drug discovery in exchange for diversifying their risk among multiple pharmaceutical company partners. In essence, these platform companies have become information and/or service companies, assisting in the creation of integrated discovery platforms from either a biology or chemistry standpoint. Then, verticality has been created through partnership with a pharmaceutical company, which assumes the risk (and the associated benefit) related to drug development.

The essence of this new paradigm of biotechnology industry collaboration is the creation of as broad a drug discovery platform by the formation of collaborations or consortia as possible. Of course, the horizontal strategy does not guarantee success, as it places a burden on the combinatorial chemistry, genomics or gene therapy company to do multiple, lower value corporate deals around its technology platform, at all times hopefully protecting against the risk of technological obsolecense.

An intriguing aspect of the horizontal tool or target technology deals is that, while these technologies provide a starting point for drug discovery, the ultimate therapeutic product which emerges contains little or no intellectual property of the tool/target technology. Thus, one is left with the question of what is fair compensation for a better starting point for drug discovery?

The answer depends on a number of factors. Most important is, not surprisingly, the stage in the drug development process the tool or target technology addresses. With respect to genomics, is the contribution of the technology simply a gene sequence that codes for a protein, or is it the protein itself? The collaboration announced by Genetics Institute claims to deliver secreted proteins, not just the gene sequences that are delivered by companies such as Human Genome Sciences and Incyte Pharmaceuticals.

A similar distinction can be drawn in the combinatorial chemistry field. Does the combinatorial library consist of potentially interesting compounds generated around a chemical core in the public domain, or is the library derived from a proprietary chemical theme of known utility contributed by the combinatorial company?

Of course, other factors also bear on valuation - the importance of the particular disease state, whether there have been prior successes using the particular tool or target, and, of course, the trendiness of the particular technology platform.

What legal agreements are used to permit access to tool and target technologies? The simplest method is by way of a material transfer agreement (MTA), which involves the granting of the right to use a biological material for internal, non-commercial use. MTAs typically involve payment of a flat fee (or no payment at all) for internal use of such material, and do not include the transfer of any intellectual property.

Higher up in the value chain is a screening licence, which is a licence to use a tool or target technology in-house for commercial research purposes. Typically, such licences are negotiated when a target has demonstrated utility and if there is a defined application for its use. Alternatively, if a tool such as a combinatorial chemistry library is involved, the library may be developed around a specific chemical theme known to be important for a disease state. The licence typically covers both the patented process and patented or unpatented biological or chemical materials.

The screening licence will run for a finite time period, and will normally also include diligence requirements. It is typically non-exclusive; the licensor will permit multiple pharmaceutical partners to fish in the same compound pool, and the partner who generates a hit first will have the opportunity to obtain an exclusive licence for commercialization. Execution of the screening licence is accompanied by payment of an upfront fee (often referred to as an access fee). If the screening results in the identification of a lead compound which ends up as a drug, the licence will require the traditional constellation of drug development payments, including royalties and milestones.

The third type of arrangement is a licence to an entire technology platform, such as a specifically developed combinatorial chemistry library or a biological assay of demonstrated utility. These licences are, by contrast, typically exclusive. They involve the payment of a significant access fee, as well as royalties, milestones, and other types of success fees. Such exclusive arrangements are unusual in the platform technology field, except in special cases involving, for example, a particular drug delivery technology, such as a single vector useful for a particular gene therapy application. The most common arrangement is the non-exclusive screening licence described above.

It is noteworthy that the biotechnology industry has begun to follow the non-exclusive collaboration model previously adopted in other high technology fields, such as the semiconductor and software industries. All fast-growing technologies share the characteristic that opportunities greatly outnumber available resources. The explosion of biological and chemical data accompanying the development of the genomics and combinatorial chemistry fields has led to the development of new business and legal models well-suited to execute successful commercialization strategies.

© Michael Lytton 1997. The author is a partner of Palmer & Dodge, Boston

Platform deals are replacing the traditional multiple rounds of venture capital financing as a means for biotechnology companies to gain funding. Increasingly, an initial funding round of venture capital is followed by partnership agreements with pharmaceutical companies at a greatly stepped up valuation. Here are how four biotechnology companies have structured such step ups:

The content of this article is general in nature and is not intended as legal advice related to individual situations. Counsel should be consulted for specific legal planning and advice.