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Changing The Biopharma Deal: How Far Can You Go & How Often
Changing The Biopharma Deal: How Far Can You Go & How Often
the Biopharma Deal: How Far Can You Go & How Often
Mark G. Edwards is the founder and managing director of Bioscience
Advisors, Inc. Previously he was the founder and managing director of
Recombinant Capital, Inc., also known as Recap.com.
The theme of the 2017 national meeting of the Licensing Executive Society was announced as
“Harnessing the Winds of Change.” While this theme may have been inspired by the meeting’s venue in
the Windy City, it seems apropos to investigate the role of change in biopharma alliances.
Biopharma deals change a lot. Approximately 300 deal amendments are SEC‐filed each year,
with 3,800 deal amendments since 2005. That’s without counting 600+ restated agreements that have
been SEC‐filed over the past dozen years. Based on roughly 600 unique biopharma agreements’ being
SEC‐filed as material to one or both parties annually, this suggests that biopharma deals are amended,
on average, once every two years, and one in twelve agreements is restated over its effective period.
This shouldn’t come as a great surprise, however, as product development takes years, and a
successful alliance might endure for decades. Still, given the effort and expense that goes into drafting
and negotiating biopharma alliance contracts, it’s perhaps helpful to examine the types of changes that
are frequently made to deals. Doing so may lead to insight as to why deal changes are made, and more
generally as to the optimum trade‐off between contract specificity and flexibility.
Methodology. For purposes of this analysis, we looked at how biopharma alliances change –
through amendments, restatements and conditional provisions that anticipate change from the outset.
With respect to amendments, we looked at the timing of the amendment relative to the
commencement date of the contract to which the amendment relates. With respect to restatements,
we analyzed the key terms for a subset of alliances for which both the original and restated contracts
were available. Finally, with respect to conditional provisions, we analyzed the frequency and
classification of several contract provisions in recent biopharma alliances versus their use in alliances a
decade ago.
Specifically, for restated alliances, we analyzed a subset of 40 alliances restated between 2005
and 2012 for which the BioSci database has unredacted contracts (typically FOIA‐released) for both the
original and restated deals. For conditional provisions, we analyzed the frequency and classification of
Right of First Refusal (ROFR), Right of First Negotiation (ROFN) and Change of Control (CoC) provisions in
alliances commenced from 2007 to the present versus 1997‐2006. As with most BioSci analyses, the
tags to specific deal provisions included in the conditional provisions analysis are accessible directly via
the links in the embedded spreadsheets. Subscribers to BiosciDB may access the full biopharma alliance
from which each provision was extracted. Also, for the restated commercial alliances, there are links to
Deal Snapshots for both the original and restated deals.
Our definitions of the various financial and other key terms are as follows:
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1. Deal Size – a summation of all upfront, R&D and milestone payments, including any equity
or loan amounts, to be paid to the licensor;
2. Maximum Share (“Max Share”) – the highest royalty tier, profit split and/or transfer price
owed to the licensor;
3. Upfront Cash – the license fee plus any annual payments within 5 years from signing that
are not based on events (i.e. not milestones);
4. Upfront Equity – the total payment for licensor shares sold to licensee at signing;
5. Contingent Equity ‐‐ the total payment for additional licensor shares sold to licensee under
contingent circumstances (e.g. at IPO, clinical progression, put);
6. Development and Regulatory Milestones (“Dev/Reg”) – the total milestone amount to be
paid to the licensor through launch in all jurisdictions for the first product or indication;
7. Other Milestones (“Other”) ‐‐ the total milestone amount to be paid to the licensor through
launch in all jurisdictions for additional products and/or indications;
8. Total Pre‐commercial Payments – the sum of Upfront, Equity, Dev Cost, loans, Dev/Reg, and
Other milestones to be paid to the licensor through launch in all jurisdictions;
9. Sales Milestones (“Sales”) – the total milestone amount to be paid to the licensor in the
event that all specified commercial sales thresholds are met;
10. EFR $200M – the Effective Royalty Rate (EFR) owed by licensee to licensor in the event that
annual net sales reach $200M;
11. EFR $500M – the Effective Royalty Rate (EFR) owed by licensee to licensor in the event that
annual net sales reach $500M;
12. EFR $1B – the Effective Royalty Rate (EFR) owed by licensee to licensor in the event that
annual net sales reach $1 Billion;
13. Maximum Royalty (“Max Royalty”) –the highest royalty tier owed by licensee to licensor, not
counting any profit split or supply payment;
14. Marketing Fee ‐‐ the percentage of net sales paid by licensor to licensee (typically for co‐
promotion or distribution services);
15. Transfer Price ‐‐ the percentage of net sales or $/unit associated with commercial supply by
licensor to licensee (may be additive to Max Royalty);
16. Manufacturing Cost ‐‐ the percentage over Fully Burdened Manufacturing Cost (FBMC)
associated with commercial supply by licensor to licensee;
17. Profit Split ‐‐ the highest percentage of Gross Profits (GP) or Net Profits (NP) owed to
licensor by licensee (may be contingent on co‐dev responsibilities by licensor);
18. Field of Use (“Field”) – the uses for which the product or technology is licensed (may be all
uses, or limited by disease and/or type of product);
19. Development Cost Reimbursement (“Dev Cost”) – the extent to which the licensee
reimburses R&D costs incurred by the licensor post‐signing (may be full reimbursement or
co‐development, in which instance licensor bears some development costs post‐signing);
20. Territory – the geographic extent of the license (may be worldwide or more limited);
21. Role Reversal – the circumstance whereby the licensor takes on commercialization
responsibilities originally allocated to the licensee;
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22. Share of Sublicensee Revenue (“Sublicensee Rev”) – the share of upfront, milestone and
other non‐royalty revenues paid by a sublicensee to licensee that are remitted to licensor;
23. Right of First Refusal (“ROFR”) ‐‐ typically a right held by licensee, conditional on an action
by the licensor or third party, wherein the terms of exercise are pre‐determined or subject
to third party equivalence;
24. Right of First Negotiation (“ROFN”) ‐‐ typically a right held by licensee, conditional on an
action by the licensor or third party, wherein the terms of exercise are to be negotiated at a
future time; and
25. Change of Control (“CoC”) ‐‐ a right held by a party to modify the alliance terms in pre‐
determined respects in the event the other party experiences a majority change of
ownership.
Deal Amendments. As shown in Figure 1, 90% of deal amendments relate to deals signed within
10 years of the amendment date. In turn, these amendments are quite evenly split between deals
commenced within the past five years and deals commenced 6‐10 years prior to the amendment date.
This suggests there may be a bi‐modal distribution in the use of amendments: Some deals are amended
shortly after signing and regularly thereafter (e.g. extension of the research term or addition of alliance
targets), while other deals are only amended once the partnered program (or environment) has evolved
beyond what was envisioned when the alliance commenced.
Restated Deals. Of the 40 alliances restated between 2005 and 2012 for which the BioSci
database has unredacted contracts, eight (20%) involve a university or other research institution as
licensor (“university deals”), while 32 (80%) involve two commercial entities (“commercial deals”). As
shown in Figure 2, for the commercial deals royalty rate (including Profit Split and Transfer Price) was
the most frequently changed term in the restated deal, as it changed in 23 of 32 instances (72%).
Royalty rate changes were evenly distributed across deals at all stages of development at the time of
restatement. Changes in milestone payments (Dev/Reg, Other and Sales) were next most frequent – in
19 of 32 instances (59%). Milestone payment changes were also evenly distributed across deals at all
stages of development at the time of restatement.
Field, Dev Cost and Territory were the next most frequent changes, each occurring in
approximately 25% of the restated commercial deals. Changes in Field occurred predominantly in deals
restated at Phase I/II stage of development, while changes in Dev Cost and Territory were more evenly
distributed across all stages of development.
There was Role Reversal in 2 of the 32 commercial deals – the Vanda/Novartis alliance for
Fanapt to treat schizophrenia (restated after approval), and the PPD/Takeda alliance for Nesina to treat
type 2 diabetes (restated at Phase II). While product reversion is quite common with alliance
terminations, role reversal in a restated contract suggests a more nuanced and coordinated transition of
the commercial function from licensee to licensor.
With respect to the eight restated university deals, four (50%) had changes to the royalty rate,
and three (38%) had changes to the terms (or definition) of Sublicensee Rev sharing.
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For all the restated alliances, there are summaries of key changes and specific deal terms of the
restated deals in the attached Restated spreadsheet [Link to Restated spreadsheet.] For the restated
commercial deals, there are also links to Deal Snapshots for both the original and restated deal.
Conditional Provisions. As shown in Table 1, only a minority of biopharma license agreements
have as conditional provisions one or more of: a Right of First Refusal (ROFR), a Right of First
Negotiation (ROFN), or a Change of Control (CoC). In addition, there hasn’t been much movement in the
frequency of these conditional provisions for deals commenced in recent years as compared to alliances
of a decade ago. As discussed below, however, for those biopharma agreements that include such
conditional provision(s), there has been recent change in the classification of the provision by the
parties.
Right of First Refusal. Figure 3 shows the number of tagged ROFR provisions for alliances
commenced in 2007‐17 versus 1997‐2006. BioSci analysts have tagged specific ROFR provisions in each
of these contracts and classified each provision by the type of change to which the right pertains. These
classifications are Product (e.g. new or improved product or formulation), Field of Use (e.g. additional
indications currently outside the scope of the license), Territory (i.e. additional territories currently
outside the scope of the license), and Other (e.g. rights in the event or asset divestiture or liquidation).
As compared to ROFR provisions in 1997‐2006, recent ROFR provisions continue to be
predominantly Product‐based (54%), but Field of Use expansion (24%) has overtaken Territory
expansion (17%) as the next most common ROFR classification. This suggests that licensees may have
heightened concerns that partnered programs will evolve in unexpected ways for additional uses.
There are links to the individual ROFR provisions, as well as summaries of specific deal terms of
alliances having ROFR provisions, in the attached ROFR spreadsheets [Link to ROFR 2007‐17
spreadsheet.]
Right of First Negotiation. Figure 4 shows an equivalent analysis of tagged ROFN provisions. As
compared to ROFN provisions in 1997‐2006, recent ROFN provisions are less Product‐based than
previously (46% versus 53%), with Territory expansion growing in frequency (37% versus 30%) relative to
deals of the prior decade and relative to Field of Use expansion (16%). This suggests an effort by
licensees to expand their rights from regional to global should the opportunity arise.
There are links to the individual ROFN provisions, as well as summaries of specific deal terms of
alliances having ROFN provisions, in the attached ROFN spreadsheets [Link to ROFN 2007‐17
spreadsheet.]
Change of Control. Finally, Figure 5 shows the number of tagged CoC provisions for alliances
commenced in 2007‐17 versus 1997‐2006. Once again, BioSci analysts have tagged specific CoC
provisions in each of these contracts and classified each provision by the party impacted in the event
that party experiences a change of control. These classifications are Originator (i.e. the licensee has
certain rights in the event the licensor has a change of control), Licensee (i.e. the licensor has certain
rights in the event the licensee has a change of control), Reciprocal (i.e. each party has the same rights
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in the event the other party has a change of control), and Variable (e.g. each party has certain rights if
the other party has a change of control, but the rights differ by party).
As compared to CoC provisions in 1997‐2006, recent CoC provisions are more Originator‐based
than previously (63% versus 55%), with corresponding decreases in Licensee impact (19% versus 23%) or
Reciprocal treatment (10% versus 15%). Since most Originator‐based CoC provisions eliminate co‐
development and/or co‐promotion options, this suggests that licensees are increasingly unwilling to
have such options extend to an acquirer of the licensor.
There are links to the individual CoC provisions, as well as summaries of specific deal terms of
alliances having CoC provisions, in the attached Coc spreadsheets [Link to CoC 2007‐17 spreadsheet.]
Conclusions. This analysis has shown that parties to biopharma alliances are willing to change
their deal terms – both substantially and often. This suggests that negotiators may choose to spend less
effort elaborating the rights and obligations of each party in conditional provisions and instead endeavor
to structure a deal with the flexibility to evolve and an expectation to make changes early and often.
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