Wednesday, March 4, 2009

Licensing in the Business of Biotechnology

Business-wise, the biotechnology industry is divided into companies that create tools and technologies and companies that develop and commercialize products using these tools and technologies. The success of biotechnology companies largely depends on their licensing ability to transfer intellectual property rights of the tools or technologies for an appropriate value in either the consolidation agreements or partnering relationships. A license in biotechnology often arises in joint ventures and collaboration arrangements, while its value is determined by the rights granted by it. Considering the estimated costs of $1.2 billion to bring a drug to market, the licensing agreement remains the bridge between the companies to succeed with mutual benefit. Biotechnology companies at all stages of growth need capital and a robust product pipeline. As part of the survival strategy, the smaller biotechnology companies often provide a technology platform necessary for larger pharmaceutical companies to supplement their late-stage product pipeline. The innovations in the genomics-based drug discovery, target validation, diagnostics/ screening technologies have introduced numerous such licensing agreements between the larger-but-poor-pipeline and smaller-fund-deficient-but-innovative-technology companies in the biotechnology sector. To assess the potential value of the licensed technology or products, due diligence analysis becomes the most critical step of all licensing transactions while managing the IP portfolio of the companies. In biotechnology licensing agreements, the licensor and the licensee needs to include issues like the rights to make or sell, co-develop, manufacture, supply, transfer know-how, manufacturing know-how, sublicense to third-parties, IP rights, rights to second-generation products retained by the licensor and/or acquired by the licensee, and the access to the licensee's drug applications, etc.

Patent license agreements can be divided into in-licenses and out-licenses. In-licensing refers to agreements by which a party acquires the rights to use a patent, whereas out-licensing refers to agreements in which a patent holder grants a third party the right to use a patent. In biotechnology, in-licensing is important for large pharmaceutical companies to develop new or improved products. Because in-licensing is a way to avoid expensive and time-consuming research and development, such companies are committed to in-licensing development compounds. Companies often find it necessary to develop biotechnology products for which patented enabling technology exists (e.g., patented genetic engineering techniques). And, out-licensing is useful when a company is unable to commercially export technology. It allows a licensee to perform basic research and development during the risky development stage. Patented starting materials and processes can be out-licensed to maximize the value of technology, even by licensing basic enabling technology to multiple users. Applications of the same patented core technology are also divisible by out-licensing; e.g., by diagnostic and therapeutic market (field-of-use restrictions). This provides multiple royalty incomes from single-core technology. It is also possible to extract multiple royalties by out-licensing a single biotechnology product. Patent rights to a gene can be licensed to a number of companies. Those rights may include, for example, manufacturing a specific protein from the gene, developing diagnostics and/or therapeutics using the gene, and developing a gene-specific delivery system.

IP transfer agreements can be further categorized into confidentiality agreements, material transfer agreements, de¬velopment (the licensee assumes all responsibility for further development), co-development agreements (two parties collaborate on continued development), and distribution agreements. In confidentiality or nondisclosure agreements, the development of a drug candidate involves the use of confidential informa¬tion such as source, research findings, methods of production, technology used, and business in¬formation and thus all informa¬tion need to be protected. The materials transfer agreements are made when a licensor provides the drug samples or information pertaining to it to a potential licensee who wants to evaluate a new product or process. Even after acquiring new IP from a public institution, it is not always possible or feasible for a single private company to carry out all stages of production and marketing. The company may need to collaborate with others in order to complete prod¬uct evaluation (preclinical toxicity tests, clinical trials, and so on). Besides, high-quality, good manu¬facturing practice (GMP) production facilities are needed to develop products for the mar¬ket. The licensee can either pay other agencies to perform some of the tasks or collaborate on mutual beneficial licensing terms with them. In return, the partnering company may request a share of the IP rights or a portion of the revenue generated by product sales. Technology licensing agreements allow one company to use the proprietary materials or know-how of others. Such an agreement clearly defines the validity of the license, the kind of license (ex¬clusive or nonexclusive), the territory in which the license is valid, the market in which the product will be released (public sector or open market), whether or not the product can be sublicensed, the amount of money to be paid up front, and the royalties that the licensor will receive. The territory is the geo¬graphic region in which the licensee is permitted to sell the product. Sometimes, nonexclusive licenses are awarded to licensees in order to promote competition between them. Or an exclusive license may be granted to market an expensive product within a limited market—un¬less such market exclusivity is guaranteed, no one may be willing to manufacture it. The guiding principle for deciding whether to grant exclusive licenses of nonexclusive licenses should be that while it is most important to bring new products to market at affordable prices. Health-related products can lead to liabilities; especially susceptible products, such as vaccines, are tested on healthy volunteers. Often, compa¬nies are unwilling to market a product because of potential liabilities. The licensing agreement for a health-related technology must define the cases in which the investigators will, and will not, be held responsible (for example, such cases might involve bad or inferior product, improper storage and use, administration of the wrong dosage) and the licensee must take out an appropriate amount of insurance before starting trials. The clinical tri¬al agreement should also describe how, and how much, an individual who is harmed by a health product should be compensated.

Generally, the licensing payments are determined by the type of the technology, patent portfolio, drug regulations, stage of development, market size, and exclusivity (exclusive, sole, or nonexclusive and/or restricted by field of use, territory or time), etc. The licensing fee includes signing-up fees or up-front payments, milestone payments and royalties. The signing fees allow a licensor to compensate money spent on developing technology or drug delivery platform. These fees are usually modest for basic or undeveloped technology and nonexclusive licensing. Many biotechnology inventions require substantial development or must be combined with other technologies to create a product (e.g. delivery devices). Therefore, a common strategy is to keep the signing fee modest but allow other fees to increase as the technology becomes more promising. Milestone or benchmark payments are used to compensate the licensor when an invention demonstrates value that was not yet proven at the time of licensing. Milestone payments are tied to such contingencies as filing an investigational new drug application (IND) and beginning phase I, II, and III clinical trials as well as to stages that indicate a potential for success —such as when filing a new drug or product license application (NDA or PLA) or receiving approval to market. They can offset non-reimbursed costs that remain with the license and are usually back-end loaded. Milestone payments are critical revenue generators and are likely to be high for early-stage molecules and more for later-stage molecules. It is extremely difficult to estimate royalty rates for biotechnology inventions because the final product is often unknown at the time of licensing. In general, a therapeutic compound carries a higher royalty than a research tool such as a screening assay. Royalty payments are only made as a percentage of net sales of the therapeutic or technology to develop the molecules.

For example, a company can acquire a product for a modest up-front fee, conduct preliminary tests till phase 2 trials for the target indication, and reach an attractive financial position rapidly and relatively inexpensively. Reaching this stage costs more, and takes longer, for a startup. Nevertheless, building organizations is something that venture capitalists are good at, making it a fairly low-risk activity. Although the cost of any component can be debated, it is clear that in-licensing is a cheaper, faster way to start a biopharmaceutical company than building one around a new technology and venture capitalists too favor certain business model over others when evaluating new plans. Thus, licensing becomes an inherent part in the business model of biotechnology companies to achieve near-term or long-term strategic goals. This issue is more relevant from the perspectives of developing countries that either do not have expertise to deal with such complex IP licensing issues or the government officials are ignorant and/or lack expertise which discourages private companies that might be interested in collaborations. To make any comments or suggestions, please write to virenkonde at gmail dot com. Thanks!
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