Large pharmaceutical manufacturers generally prefer biotech licensing deals that have simple structures, Bristol-Myers Squibb VP-Business Development Graham Brazier said.

"The reality is that a pharma company would always prefer to do a plain kind of deal," Brazier said during a panel discussion at the recent Biotechnology Industry Organization annual meeting in Chicago.

"What you see when you read about more complex kinds of structures, that's more the case of the pharma company really wanting to do the deal and actually had to show flexibility in terms of working with the biotech company to come up with a structure that was probably more along the lines of what the biotech company was looking for."

"We are simple people and we prefer to do simple deals if we possibly can," he explained.

However, more complex deal structures may become more common in the future as the biotech licensing landscape becomes increasingly competitive and licensees are forced to offer more attractive terms to licensors (¹ Also see "Biotech Licensing Often More Cost-Effective Than In-House R&D For Pharma" - Pink Sheet, 24 April, 2006., p. 3).

Flexibility Is Essential

While simple deals are preferred, panel members agreed that flexibility in deal structure is essential in the current competitive licensing environment.

"The key factor in any of these deals both from the financials and the structural standpoint is flexibility," Johnson & Johnson VP-Alliance Management Robert Wills said.

Wills cited J&J subsidiary Ortho Biotech's 2003 co-development deal with Millennium for the multiple myeloma therapy Velcade as an example of the importance of flexibility (² Also see "Millennium Retains Velcade U.S. Rights; J&J Picks Up Half Of R&D Costs" - Pink Sheet, 7 July, 2003., p. 7).

J&J was competing with four or five big pharma companies for global rights to Velcade, he recounted. However, four days before the deal had to be finalized, Millennium's board said they only wanted to do a deal for ex-U.S. rights.

The competing companies dropped out due to the time constraints, but J&J agreed to work around the clock in the remaining time to restructure the deal, Wills said. "That's what it takes if you want to do deals in this competitive world - you have to be flexible."

Roche's "Hands-Off" Approach

Roche Pharmaceutical Division CEO William Burns pointed to his firm's relationship with Genentech as an example of the benefits of deal structure flexibility. Roche owns a controlling share in the biotech firm, but largely allows it to operate independently.

The Genentech agreement "really is a foundation in transforming within Roche...how we think about partnerships and how we think about co-development. Had this not been so successful, I don't think I'd be here today talking about the flexible, hands-off approach that we want to apply," Burns said.

"It is simply in the bone marrow of a CEO to want to control those aspects of his enterprise which drive his results," he noted, "so it takes this kind of success to accept it the other way."

Burns said that having flexibility to allow deal structures to change over time is also crucial.

When "we do a deal with a company, this may be their first product coming to market," he said. "As we are developing that, and later as we are co-commercializing it...they change as a company. As they change...their needs change."

Burns pointed to Roche's series of agreements with Protein Design Labs as an example of a relationship that has transformed with the evolving needs of the two companies.

"We have remodeled that deal probably three or four times," he said. "A lot of that was based upon how this molecule can best be developed and the desires of PDL to execute for their opportunity."

Identify "Intractable" Issues Early On

While flexibility is important, Burns said it is also necessary for potential licensing partners to identify "intractable" issues early in discussions.

When Roche is entering into licensing negotiations, Burns said the firm seeks to find out what issues the other company's "board is insisting upon or their president wants or they feel is very important to the company that we may be uncomfortable with."

With such issues, "that is where we need to think creatively. That is where we may need to go back into our company and they may need to go back into their company and do some work."

Panel members agreed that any alliance should have a strong governance structure at the outset. Burns emphasized, however, that having the governance structure should be sufficiently flexible to leverage the unique skills of the two parties.

"A great governance committee is never a vicious law, a cold homogenous soup, it is always more like an Irish stew kept at a low boil," he said. "You want the potatoes, you want the meat, you want the carrots. You want a culture that allows the best ideas from these two differing cultures to rise to the top."

Burns suggested that firms involve individuals with expertise in alliance management early in licensing negotiations.

At Roche, "these are people who are managing three or four different alliances that we have in place and they know what works and what doesn't work so when we start talking about deal structuring, they bring an experience [and] knowledge to the negotiations table."

Big Pharma Shedding Weight

Bayer VP-Business Development Chris Seaton maintained that pharma has shown signs of being more flexible and nimble in recent years.

"You could say - and I think it is true for a lot of pharma - we have gone from dumb, fat and happy to dumb and fat," he said. "Then we got rid of the fat and now I think we have gotten rid of the dumb."

"I think pharma companies actually can move and have shown themselves to be able to move as fast as anybody else. In fact, to be honest, there are times when I have difficulty getting my biotech partners to move as fast as we do."

Burns and Wills said that co-development is one deal structure that could become more common going forward. Co-development currently accounts for two-thirds and one-half of J&J and Roche's licensing deals, respectively, they said.

The trend towards more co-development deals "is going to continue," Wills said. "I just see this as macroeconomics - supply and demand."

Co-development deals allow smaller firms to retain some control and "get better financials on the back-end to offset some of the risk through investment with big pharma," he explained.

Conversely, Merck Chief Licensing Officer Barbara Yanni speculated that the lack of available funding for early-stage companies may slow the trend toward co-development deals. Biotechs with early-stage products have turned to licensing deals with pharma due to a dearth of early-stage venture capital (³ [A#00680160008], p. 16).

"Since there is a cash constraint there, and if that continues to be the case, that puts a little bit of a damper on the trend towards more co-development," Yanni explained.

"Cash is King" In Early Stage Deals

Regardless of deal type, Wills said that early-stage licensors generally focus on financial terms when choosing partners, while the characteristics of the potential partner play a greater role in later-stage deals.

"Late stage, my experience is that it isn't always cash that wins the deal," he said. "Late stage is a combination of cash, but a good piece of it is chemistry and are you going to be able to work together because it is a big commitment that you are making, both money and resources."

Conversely, "at the early stage, cash seems to be king because they are less complicated deals. When you are getting into them, the optics...facing an early stage versus a later stage seem to favor money."

Seaton agreed that the unique skill sets of potential large pharmaceutical partners can be a key factor in a biotech's licensing decision.

"One thing that we certainly sell to all people we talk to is (a) you can work with us [and] also (b) we have something to offer here. We have capabilities. We have infrastructure. We have things you just do not have."

[Editor's note: This is the last in a series of stories concerning the pharma/biotech licensing landscape. The previous two stories, appearing in the April 17 and April 24 issues of "The Pink Sheet," dealt with biotech and pharma's motivations for entering into such deals.]

Big Pharma Seeking Simple Deals In Complex Biotech Licensing Environment

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