The Alphabet Soup of Alliance R&D

Section I.C.? Reimbursement Basis? ?Biotechnology’s financial community, consisting of VCs, institutional investors and investment banks, loves acronyms.? From this perspective, the biopharma investment proposition started with the intention of creating FIPCOs (fully integrated pharmaceutical companies).? However, due to the duration, cost and risks of drug development, plus investors’ predilection to DPSA (deep pockets, short arms), a strategic model that prominently featured biopharma alliances quickly came into fashion.

There have been two longstanding, and competing, investor perspectives on alliance formation.? One perspective, I’ll call OPM (other people’s money), is largely self-explanatory.? The other perspective, I’ll call SUU (Stelios’ uncapped upside – not a real acronym!), is more nuanced.? In any alliance discussion, the first deal element where these two perspectives come into direct conflict is the reimbursement basis of project development costs.

In the early post-FIPCO years, most biotech managements were fans of OPM.? Venture backers and other investors were more skeptical, since any partnered project was a hit to SUU for the company as a whole. Quarterly advance payment for sponsored research via FTEs (full time equivalent researchers) was a workable compromise, as this deal element permitted the offloading of direct (and some indirect) project costs, while adding scale to the company overall.? From the investor perspective, however, licensed projects were partnered “out” – i.e. augmenting resources while preserving SUU for the projects remaining “in”.

By the late 1990s and early 2000s, FTE commitments and equivalent sponsored research approaches to OPM had soared majestically.? Millennium Pharmaceuticals led all contenders with $500+ million in committed FTE-type payments via multiple alliances, each deal having a five-year sponsored research component.? This meant roughly $100M/yr in sponsored research, or 350-400 sponsored researchers annually paid for by MPI’s partners.

Around this same time, however, the SUU perspective was being embraced by a new wave of biotech investors.? FIDOs (fully integrated development companies, no research) were assembled around clinical assets that had been cast aside by top pharma for various reasons.? Where small-scale clinical trials might lead to compact patient populations, FIDOs were soon deemed to be specialty pharma.? Akin to VC-backed medical device companies, FIDOs and specialty pharma companies were built to be acquired.

?Over time both approaches to biotech investment revealed their shortcomings.? For the FTE-based OPM structure, the completion of research services in each alliance left management with a spiraling burn rate and unpredictable news flow.? For the FIDO and specialty pharma approach, the expertise, cost and risks associated with clinical progression, even in niche therapeutic areas, was much greater than anticipated.

In response to these setbacks, biotech managements turned to a new type of alliance:? co-development.? From the OPM perspective, co-development offered the potential for additional cash flow during clinical development, plus closer association with clinical expertise and news flow.? From the SUU perspective, co-development deals significantly decreased capital requirements for each project, as compared to going it alone, and allowed a company to form a basket of such projects.? When combined with co-promotion rights in key territories (called Co-Co alliances), these deal structures offered the prospect of SUU with respect to the booking of revenues as well as profits.

Today, the menu of possible alliance structures consists of all of the above.? Although there’s much to be discussed regarding the post-launch payout and optionality of various deal structures (to be covered in later articles), with respect to the topic of R&D reimbursement, here’s where I arrive:?

1)????? FTE-based sponsored research is fundamentally fee-for-service, at least in the absence of an exceptionally enriching back-end.? Typically, there is no project reversion to the originator if the project stalls in development.? In addition, the FTE payment structure invites build-to-budget staffing and infrastructure, all of which must be rationalized once the sponsor’s cash spigot turns off.

2)????? Co-development of the 50/50 Co-Co variety is a long-shot gamble that favors the house.? Top pharma companies with significant market share in a therapeutic area benefit throughout the extended period when multiple would-be entrants jostle vigorously with each other during development.? Even when a new entrant emerges victorious (and is likely acquired at a hefty premium), the combined expenditures by all other contenders suggests that current market leaders are well served by heavy co-development expenditures by third parties in their therapeutic area.

My preferred R&D reimbursement structure is what I’ll call TPC (tide pool co-development).? It proceeds as follows.? Find a partner who is willing to sponsor at least three targets and/or projects for a value-creating period of at least three years.? For a platform company or a biotech having multiple early-stage projects, that would imply $10 million per project; for a company having multiple IND-enabling projects, twice as much; and for a company with multiple POC projects, twice again.? The commercialization partner would commit to the full amount in advance (i.e. $30M, $60M or $120M) and would obtain options to exercise (or relinquish) its rights to each project at agreed upon stages.? The originator would control project expenditures (within limits), receive enriching payments upon option exercise and retain all rights to relinquished projects.

Here's an example of TPC, the 2003 Tularik/Amgen collaboration for druggable cancer targets:

Amgen acquired Tularik less than a year after the alliance commenced, so unfortunately there wasn’t much chance for this deal to play out as a workable synthesis of the OPM and SUU perspectives.

You can see the introduction to this ongoing series of articles about best practices in biopharma licensing, or go directly to links to previously posted articles of the series here.