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PALO ALTO — Mountain View-based Edison Pharmaceuticals tapped Morrison & Foerster for counsel as it inked a massive $4.3 billion development agreement with Japan’s Dainippon Sumitomo Pharma Co., Ltd.

Palo Alto corporate partner Michael O’Donnell and Washington, D.C. corporate partner Van Ellis led the MoFo team advising Edison. The team also included Palo Alto corporate of counsel Gavin McCraley, San Francisco corporate associate Aaron Schohn and Palo Alto corporate associate Whitney Lau. DSP turned to Foley & Lardner for legal counsel.

Edison, which was founded in 2005, focuses on the development of drugs that treat inherited mitochondrial diseases. Because the mitochondria regulate metabolism, these diseases have far-reaching effects across a range of organ systems, but there are currently no approved treatments.

The agreement expands a March 2013 collaboration contract struck between the two companies that included pediatric orphan inherited mitochondrial and adult central nervous system diseases. The new deal focuses on the latter. As part of the agreement, DSP will pay $10 million up-front plus $40 million in possible earnouts for some development and commercialization rights in Japan and North America to jointly discovered drugs. DSP will also fully fund the development of 10 new medicines. And for a treatment of central nervous system disorders that is currently in clinical trials, DSP will receive broadened rights that include North America. The bulk of the agreement—$3.9 billion—is tied to commercial milestones. DSP will also invest $50 million in Edison through a preferred stock purchase.

O’Donnell, who in 2013 led four of the top 25 biotech financing deals in the Bay Area, said his team’s challenge was aligning the incentives of both parties in a way that would allow Edison to maintain all of the rights for its core technologies and particular pediatric mitochondrial disease focus. By giving Edison primary rights to “other compounds” discovered jointly and granting DSP commercial power in Japan with a “right of first discussion” to certain North American rights, they were able to strike that balance, he said.

The agreement “creat[es] an incentive for DSP to introduce compounds from its own library into the collaboration and to devote its substantial chemistry resources to optimizing those compounds, even if these compounds were ultimately going to be commercialized in North America by Edison,” O’Donnell explained. “I believe this type of innovative structure taking advantage of the strengths of both parties could be a trend for future collaborations between big pharma and the smaller biopharma companies.”

Contact the reporter at callison@alm.com.