When the Change of Control Gate Opens

Section I.V.? Change of Control? ?There are few things more disruptive to a successful biopharma alliance than a change of control.? Whether it occurs during the course of research, the conduct of clinical trials, the scaling of manufacture, the preparation for launch or the management of commercialization, a change of control event can change everything – both contractually and operationally.

From this perspective, therefore, it’s unfortunate that the biopharma industry has so many M&A deals every year.? According to Nature, there were 136 biopharma M&A deals in 2024, down slightly from 144 deals in 2023.? What’s a biopharma alliance partner to do?? Why, insert a crafty change of control (CoC) provision into each of its alliances, of course.

BioSci analyzed approximately 500 CoC contract provisions of alliances commenced over two decades from 1997 to 2017.? Such provisions generally impact the party incurring a CoC event.? For example, BioSci’s analysis showed that 59% of CoC provisions gave the commercialization partner certain rights or options in the event the program originator experienced a CoC event.? 21% of CoC provisions gave the program originator certain rights or options in the event the commercialization partner experienced a CoC event.? 13% of CoC provisions gave reciprocal rights or options to the alliance partner not experiencing a CoC event when the other party did so.? Finally, 7% of the CoC provisions analyzed by BioSci had separate rights or options for each partner in the event the other party experienced a CoC event.

Looking at a subset of approximately 150 biopharma alliances commenced since 2010, the relative frequency of which party is impacted by the CoC provision is roughly preserved.? For deals commenced since 2010, 68% of CoC provisions gave the commercialization partner certain rights or options in the event the originator had a CoC.? 15% of 2010+ deals added originator rights or options following CoC of the commercialization partner.? 10% of recent alliances had reciprocal rights or options for the alliance partner not experiencing a CoC event, and again 7% of 2010+ deals had separate CoC provisions pertaining to each partner.

All well and good, but what do these “certain rights or options” entail?? For the 2/3’s of recent alliances where the CoC provision impacts the program originator, the most frequently mentioned consequences were, in order of frequency, (1) end of joint committee(s), (2) truncation of research term & transfer of activities, (3) option to terminate, (4) cancellation of co-promotion, and (5) segregation of competing programs.? Most CoC provisions impacting originators entailed two or more of the consequences shown above, to be invoked at the commercialization party’s discretion.? Less frequent CoC provisions included (6) loss of co-development, (7) right of first negotiation (ROFN) to bid for control of originator or R&D program, (8) end of non-compete, and (9) payment of a portion (e.g. 10%) of acquisition price.

With respect to the 15% of 2010+ deals where the CoC provision impacts the commercialization partner, the most frequently mentioned consequences were (1) payment, followed by (2) option to terminate and (3) ROFN to bid for control of the R&D program.? Specific payments due on CoC ranged from $50-150K to 1.5-10% of total CoC consideration.? The 7% of recent deals having separate CoC provisions pertaining to each partner largely recapitulated the consequences mentioned above.

That leaves the 10% of recent alliances having reciprocal rights or options for the alliance partner not experiencing a CoC event.? To me, these are the craftiest provisions, insofar as most partners in biopharma alliances aren’t peers, so reciprocal provisions tend to have very different implications depending of which party is impacted.? The most frequently mentioned reciprocal consequence was (1) non-CoC party option to terminate, followed by (2) end of non-compete and (3) either party option to terminate.

To see how differently a reciprocal CoC provision actually plays out, one need only look at the 1998 Phase III regional co-development alliance between Centocor and Schering-Plough for the tumor necrosis factor (TNF) antibody that later became Remicade.? Here’s the deal snapshot:

Here’s the deal’s reciprocal CoC provision:

When Johnson & Johnson purchased Centocor for $4.9 billion in 1999, Remicade was already a $100+ million product.? Although Schering-Plough had the right to terminate, doing so would have resulted in the loss of S-P’s 60+% profit interest in a rapidly expanding biologic.? In fact, over time Remicade became the top selling biologic product of its era, as shown here:

In 2009, Merck acquired Schering-Plough for $41 billion.? The deal was structured as a reverse merger (technically S-P acquiring Merck) to side-step the Remicade CoC provision, but J&J called Merck’s bluff and sued to have the alliance terminated.? When the dust settled two years later, the alliance lived on, but Merck had to make a $500 million payment to J&J, lost 30% of its licensed territory and dropped its share of profits from 60+% to 50/50.

What appeared to be an innocuous property fence, jointly constructed and maintained by amicable neighbors, turned out to be a gate that opened in only one direction, allowing one neighbor access to a sizeable chunk of the other’s backyard!

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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.