How Hard to Push Diligence

Section II.G. License Maintenance and Diligence? ?It’s difficult to gauge how hard to push a prospective commercialization partner to accept substantive diligence requirements.? Even broaching the topic of non-performance is awkward, as it may sap the goodwill needed to stitch a collaboration together.? But setting, and enforcing, diligence requirements will define the path to project reversion, which in turn may lead to second chance alliances.

There are five types of diligence requirements typically found in biopharma licenses.? Of the five, a defined standard of Commercially Reasonable Efforts (“CRE” or Diligent Efforts) is most common.? The other four types of diligence provisions are a contractually specified development timeline (“Timeline”), minimum annual development expenditures (“Dev Spend”), commercial expenditures (“Sales Spend”) and minimum annual royalty payments (“Min Payments”).

BioSci analyzed approximately 600 SEC-filed alliances commenced between 2007 and 2020 for license maintenance and diligence provisions.? Of these agreements, CRE was utilized in two-thirds of the licenses and was the only diligence standard in over half the deals.? Timeline requirements were in 40% of analyzed alliances, Min Payments were in 25%, Sales Spend in 10% and Dev Spend was in 6% of deals.

When there was more than one diligence requirement, CRE was typically paired with an additional requirement -- with Timeline most often, then next most often with Dev Spend.? Here’s the breakdown of total mentions for each of the five diligence types:

With such heavy reliance on CRE as a defined standard of diligence, it makes sense to examine how much the term has shifted from deal to deal.? It turns out there’s a lot of variation from one CRE definition to the next.? Here’s a few specific examples:

To see the variation, it’s helpful to view these CRE definitions side-by-side, as in the chart below:

By examining several hundred CRE definitions, one finds that certain elements are used more or less frequently, as shown here:

Turning next to the diligence landscape beyond CRE, one must first consider the type of licensor, since CRE is the dominant diligence standard for all but university licenses.? Top pharma is likely to obtain Timeline requirements when it out-licenses a compound, but pharma is far less inclined to accept Timeline requirements when in-licensing from biotech.? Mid-tier pharmaceutical companies tend to be most reliant on Sales Spend requirements when out-licensing compounds to biotech.? Here’s the breakdown of diligence requirements by the type of licensor:

Finally, from the perspective of a biopharma project originator looking to invoke specific diligence requirements beyond CRE, inclusion of Timeline requirements is most likely, although inclusion of Min Payments (to sustain the license or exclusivity) have made inroads for alliances commenced at Phase II or later stages.? Here’s the frequency of each non-CRE diligence requirement by project stage at signing:

Choosing which, when and how hard to push for substantive project diligence requirements is perhaps the most subtle skill that’s required of a biopharma BD&L professional.

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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.