The Top Five Drivers of a Successful Out-licensing Process

With an almost non-existent IPO market and reduced European venture capital investment in recent years, many biopharm companies are looking for alternative sources of revenue to fund their R&D and clinical operations. For biotech companies, being able to sign out-licensing agreements with a credible licensee in early stages of the company life cycle can have a significant impact. In addition to the immediate capital infusion, the licensor benefits from increased technology credibility and investor confidence, which normally translates into enhanced capability to raise capital in the private or public market, at higher valuation. However, many companies struggle to execute an effective out-licensing strategy and fail to maximize the value of the out- licensed asset.

Ranan Lachman

THE OUT-LICENSING CHALLENGE

Being able to find a partner — and more importantly, the right partner — is instrumental to the success of most emerging biotech companies. Many companies face tremendous challenges in getting the attention of potential licensees, in some cases due to mismanagement of the out-licensing process. The following list of challenges is common to emerging biotech companies that our team has identified while working with clients to manage their out-licensing processes.

1. Identifying the right time to partner

Is later better? The cost and risk to continued development using internal resources must be weighed against the estimated value and other benefits of structuring a licensing deal. Some pharmaceutical companies are willing to pay a premium for early-stage technology. However, shopping around your technology too soon may reduce its attractiveness in the future, consume management time, and generate premature expectations from investors. Past studies revealed that drugs that are licensed at the preclinical phase are expected to create the maximum amount of value for the licensees in 85 percent of all cases in which a deal can be negotiated. While some pharma companies are looking downstream to earlier stage deals, many still shy away from seeing their investments fail in risky and undefined technologies. If pharma companies increase their appetites for early-stage deals by sweetening the deal terms, as theory permits, then the licensors' timing dilemma will become more significant and critical to optimize.

The recent Ortho Biotech and Millennium (MLNM) Pharmaceuticals Velcade deal is an example of interesting timing for an out-licensing transaction. MLNM's Velcade was approved in the US for multiple myeloma and out-licensed to Ortho biotech in a $15-million upfront and $750-million milestones deal, though 75 percent of the upside deal value will be derived from future oncology applications. Although this is a late-stage deal, the deal structure does not provide as much risk diversification for MLNM as might first appear. From Ortho's viewpoint, the deal's value provides significant risk diversification since the royalty structure and milestone payments require driving sales in other oncology applications. One might argue that the real risk in this transaction is upon MLNM since the upside deal value requires widening product indications. Had an out-license transaction occurred prior to product launch, MLNM may have lost some initial value but could have negotiated a more favorable risk sharing relationship on the product development side.

2. Identifying and prioritizing among the most appropriate strategic partners

Skipping a well thought out research process that examines strategic synergies with mid-to-large companies is a drastic mistake. Sending information to the top 40 pharmaceutical list is usually the wrong approach and results in lower out-licensing success probability. Entry into potential partners through an internal champion insures a shortened "sales" cycle. In many cases, this can be provided by an external business development firm with existing networking capabilities.

3. Assessing and defining the scientific and commercial viability of each potential strategic partner

Omitting a thorough prioritization process that eliminates less-relevant companies and targets only strategic partners and specific individuals within target companies can expedite the out-licensing process. Many companies neglect to customize the information sent to partners in accordance with their synergistic research findings and, therefore, fail to demonstrate early benefits to the partner, dramatically reducing the probability of passing an initial screening.

Berlex's (Schering's private US operating unit) out-licensing of Ventavis to Cotherix is a good example of using a wise selection process for a strategic partner. Schering AG was examining iloprost (Ventavis), a prostaglandin antagonist, for some time but had not fully captured this asset's value. Schering AG is presently marketing the product in Europe and Australia for an orphan pulmonary hypertension indication via an intravenous route of administration. By out-licensing to Cotherix, Schering AG/Berlex received FDA approval in six months with a new route of inhalation administration. While the financial terms are undisclosed, this out-license strategy to a firm dedicated to accessing the US market provides mid-size pharmaceutical firms such as Schering/Berlex with a vehicle to capture value while avoiding some of the registration and marketing support costs required to launch such a product in the US. The strategic reason for the deal is that pulmonary hypertension, an orphan indication in the US, would not necessarily provide large pharmaceutical firms with the returns required to warrant using their complex manufacturing and marketing engines. Therefore, out-licensing to a relatively small and focused firm makes a lot of sense. Cotherix, a publicly traded US biotech company, provides Schering/Berlex with additional financial returns based upon any equity participation in Cotherix. The downstream benefits to Schering/Berlex are reformulation, combined with possible line extensions in existing offshore markets for the iloprost product. Royalty streams, provided to Schering/Berlex by Cotherix, will provide further upside.

4. Having a limited network of personal relationships with key decision makers

Emerging companies have small business development teams. Management should never underestimate the value of a having a lead into the decision maker of a potential partner; licensing deals are made between people and not between companies. Managing an out-licensing campaign is a complex process requiring real-time access to data and therefore consumes valuable time and resources. Companies should incorporate a well-structured, web-based contact management and follow-up system to track and share all communications with all the internal and external parties involved in the deal.

5. Preparing the offering material

Effective offering materials take into account a realistic and pragmatic assessment of the target market, competitive product timelines and the nature of an unmet medical need. Frequently, smaller firms neglect the perspectives of larger, fully integrated partners. Attempting to maximize deal valuation by overestimating the market opportunity or underestimating developmental timelines will not insure the completion of a licensing discussion. Presenting mature, sophisticated, analytical offering material will insure that discussions produce a mutually satisfactory endpoint for all parties involved in the transaction. Critical elements to include in the offering material are IP portfolio and freedom-to-operate issues, clear summaries of clinical data including issues that can be misinterpreted by external clinicians, brief market opportunity analyses, and any relevant company/management information that can strengthen the partner's willingness to enter into further discussions.

ACTION POINTS

Out-licensing has become a crucial part of most biotech companies' business strategies. Nonetheless, several recent research reports demonstrate that biotech companies can fair better in the current licensing environment. The reports make the argument that biotech companies don't maximize the value of their assets due to inefficient out-licensing processes. To increase shareholder value, biotech companies intending to out-license one or more of their programs must do one of two things. They must either commit to a dedicated internal out-licensing team with a best-practice, out-licensing process and infrastructure that can methodically and proactively present their technology, or they should consider hiring professional assistance from a business development company that can provide its insight, experience, network, and proven processes, allowing management to remain fully engaged and focused on their core operational activities.

Lachman is a principal, and Marc Samet, Ph.D., an associate principal, with 2Value, 212.897.5808, rananl@twovlaue.com, Marcs@twovalue.com.