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One of the cornerstones of the life sciences industry has been collaboration in the research and development of new drug compounds, particularly collaboration between biotechnology companies and pharmaceutical companies. In these deals, the biotech companies typically bring promising new technologies, and the pharmaceutical companies bring the skill and resources to clinically develop, manufacture, and commercialize these technologies worldwide. But in recent years, the biotech partners in these deals have played a growing role in clinically developing and commercializing the fruits of their own research. This trend has been accelerating, particularly for late-stage compounds (i.e., compounds for which proof of concept has been established and which are ready to undergo, or are undergoing, large-scale pivotal human clinical trials), and biotechs have become an increasingly attractive source of innovation for the established pharmaceutical industry, especially as that industry seeks new products in the pipeline to replace blockbuster drugs that are starting to face generic competition. With the biotechs’ move “downstream,” these deals between biotech and pharmaceuticals have become much more complex. These days, collaboration agreements often exceed 100 pages. Yet seemingly little attention is paid to the commercialization aspects of the collaboration. Because many deal lawyers for biotech clients have grown and learned with the biotech industry, many have little experience with the complexities and challenges posed by commercialization transactions. As a result, many rely on the forms of others or simply follow the lead of the more-experienced pharmaceutical partner. Yet the interests of the biotech and pharmaceutical companies do not always align. The resulting conflicts can have unexpected, and sometimes catastrophic, consequences for the biotech company. To avoid problems, companies need to carefully consider a number of issues when structuring such arrangements. WHAT KIND OF MARKETING? In these collaborations, commercialization responsibilities are often shared through a co-promotion agreement, which may be a bit of a misnomer given that the agreements often cover both promotion and marketing. Unlike over-the-counter products, prescription pharmaceuticals are often promoted by professional sales representatives who visit doctors’ offices. The sales representatives educate doctors about the risks and benefits of the products to encourage lawful and appropriate prescribing. These visits are known as “details” and, together with associated activities, constitute promotion. Such promotional activities are separate from marketing, which was traditionally directed at physicians in the form of advertising in medical journals and at professional events. Now, marketing increasingly involves advertising directly to consumers through television, popular magazines, and other mass media outlets (which is known as “direct to consumer,” or DTC, advertising). Consequently, it is important to be clear about the exact nature and scope of activities that will be shared in a co-promotion agreement. Many agreements use the terms co-promotion and commercialization interchangeably, sometimes without definition, even though the distinction can have a significant impact on decision making, resource allocation, financial commitments, and control. Indeed, without a clear definition, commercialization could be read to include not only promotion and marketing activities, but also manufacturing and a host of other responsibilities that may never have been intended. A biotech company could then find itself responsible for recruiting personnel and for developing infrastructure to support these activities, which would be particularly costly if the company had only one product, and sharing unexpected expenses of the pharmaceutical company. Conversely, the pharmaceutical company may find that it is sharing decision making for activities that it had intended to control alone, thereby increasing the cost or decreasing the efficiency of the collaboration. SHARING PROFITS Co-promotion deals are often structured as profit-sharing arrangements, in which the biotech company forgoes its royalty in exchange for sharing the risks and the rewards of developing the product with its pharmaceutical partner. The actual profit share is often tied to the level of promotional effort made by the biotech company. For example, if the biotech partner provides 40 percent of the promotional effort, it would be entitled to 40 percent of the profits. It is important to clearly identify the costs being shared and the mechanism for allocating the costs to the collaboration’s account. As with any other profit-sharing arrangement, there is often considerable room for disagreement, even when the particulars are carefully considered in the agreement. To avoid some of these difficulties, it may be preferable, especially where the cost of goods are low, to base the remuneration to the biotech company on net sales, similar to a royalty, and to share certain defined bundles of expenses, based on selling effort or in some other proportion. In any event, when considering a profit-sharing arrangement, keep in mind that the cost of co-promotion in the years immediately after launch may substantially exceed the revenues flowing from sales of the product. While biotech companies may sometimes have more tolerance for losses than their pharmaceutical partners, biotech companies will likely have less ability to fund the upfront cash requirements of a successful launch. This is particularly true if the launch would divert resources from research and development of other products in its pipeline. HIDDEN SALES COSTS Another often overlooked expense, which may be substantial, is the cost to the biotech of maintaining an adequate sales force to satisfy its commitments under the co-promotion agreement. Consideration must be given to the expected disease indications for the product and the type of physicians who likely will be prescribing the product. For a product targeted at primary-care physicians, the sales force requirements will often be significantly greater than for a product targeted at specialists. Managers, trainers, and other supporting workers are also required to maintain a sales force. In addition, the parties must consider whether the shared co-promotion activities will include professional education and support, which is typically conducted using physicians and other medical professionals employed by the company, and managed care contracting, which is necessary to ensure that the new product is included in the formularies of prescription benefit managers, HMOs, and other managed care organizations on favorable terms. Beyond the sheer number of persons required to co-promote a product, there may be another hidden cost in carrying those employees. Typically, a sales force will promote more than one product, which means that only a portion of the sales force’s total available efforts, and therefore costs, will be allocated to the collaboration and shared by the parties. The remaining selling capacity is an asset that the biotech company can exploit to offset the unreimbursed costs of the sales force. But many deals are structured in a way that makes it difficult for the biotech company to realize this value. Not surprisingly, pharmaceutical companies want to be the ones to control the commercialization of the co-promoted product in order to more efficiently respond to market conditions and maximize product sales. And given that the parties’ objective in this regard are aligned and given that a major driver of these deals is to enable biotechs to access the commercialization expertise of the pharmaceutical industry, this would seem to make good sense. Pharmaceutical companies, however, have other internal products that their sales force can carry to defray the cost of the collaboration, and, indeed, considerations with respect to these other products may influence the pharmaceutical companies’ decisions on how to allocate resources for the collaboration. For example, a pharmaceutical company may wish to use the new co-promoted product to gain access to physicians and increase the visibility of its existing products, and therefore it may wish to use a smaller portion of the time of a much larger sales force than the biotech company would elect to use. In contrast, biotechs typically do not have other commercialized products and so would need to partner with other companies to obtain rights to additional products. But to do so, the biotech must know, reasonably in advance and with certainty, what portion of its sales force will be available and for how long. This desire for long-term certainty conflicts with the pharmaceutical company’s need for flexibility. And without some degree of certainty, the biotech will find that it cannot adequately leverage its sales force outside the collaboration, which means that it absorbs sales force costs beyond those provided for in the collaboration budget. Another often overlooked pitfall is the noncompete provision. If structured too broadly, the provision may preclude the biotech from acquiring rights to co-promote other products. The co-promotion arrangement should be structured in a way that protects the biotech’s resource commitments, but still provides the necessary flexibility for the pharmaceutical company to respond to unanticipated market events. BEWARE BANKRUPTCY Bankruptcy presents its own special concerns in the co-promotion context. As executory contracts, co-promotion agreements can be rejected by a party in bankruptcy. And because they are essentially contract service arrangements, co-promotion agreements are not protected by Section 365(n) of the U.S. Bankruptcy Code, which provides certain protections to licensees of intellectual property in the event of the bankruptcy of their licensors. While it is possible to build license grants into a co-promotion agreement to take advantage of Section 365(n), the licensee would still face problems because trademarks, which are critically important to the success of a co-promoted pharmaceutical product, are not included in the “intellectual property” protected by Section 365(n). (Other mechanisms can minimize the impact of a bankruptcy, but those options are deal-specific.) In closing, while co-promotion deals provide tremendous opportunities for companies, they also present significant risks, both financial and operational. Yet the beauty of co-promotion deals, like all life sciences collaborations, is that they involve long-term relationships where the success of the product will depend on the success of the relationship. Therefore, if issues are identified on a timely basis, compromises can be structured to create a solution that works for all concerned. John A. Hurvitz is the co-chair of the life sciences industry group and head of the technology transaction practice at D.C.’s Covington & Burling. He can be reached at [email protected].

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