Commercialisation Strategies for Innovating Firms:
Evidence from the US Biopharmaceutical Industry
Prof. Simon Wakeman
Bioscience Enterprise Forum
24 February 2012
I have built a dataset that traces ownership and licensing arrangements of c.1400
product candidates commercialized by US biotech firms over industry lifespan
EXAMPLE: LICENSING & CLINICAL DEVELOPMENT HISTORY FOR MACUGEN (AGE-RELATED MAC. DEGEN.)
2/99
3/00
NeXstar
2/02
12/02
8/05
11/06
Acquisition
Gilead
Inventor
License agreement
Acquiror/Licensor
Eyetech
Licensee/Licensor
Nektar
Drug delivery
Co-Promotion
agreement
Pfizer
Co-promoter
OSI Pharma
Acquiror/Divestor
07/98
01/99
10/00
08/01
6/04
12/04
06/06
US
IND
Phase
I
Phase
I/II
Phase
II/III
US
NDA
FDA
Approved
Phase
IV
Source: Developed from Deloitte Recap RecapRx and rDNA databases
2
Product candidates were originally developed by over 400 different biotech firms
NUMBER OF PRODUCTS BY BIOTECH FIRM*
number
of
products
60
50
40
30
20
10
49
36
27 26 25
22 22
18 18 16 16 16
15 15 15 14 14 14 13 13 13 13
11 11 11 11 11 10 10
0
* first biotech owner of product
+371 firms with less
than 10 products
Majority of products were developed inhouse but 20-25% of products were inlicensed
from pharmaceutical firms
PRODUCT SOURCE
number
of
products
1,200
1,107
1,000
800
600
400
251
200
0
developed inhouse
inlicensed product rights
4
3
acquired firm
purchased product rights
Licensing is the predominant commercialization mode but in around 25% of cases
the firm commercializes the product alone and in another 25% the firm is acquired
COMMERCIALIZATION MODE
number
of
products
700
660
600
500
400
346
332
300
200
100
18
8
1
product rights
revert
product rights
purchased
contract
renegotiated
0
product rights
outlicensed
not transferred
firm acquired
Most products are licensed before the product enters clinical trials
PRODUCT’S STAGE OF DEVELOPMENT AT LICENSING
number
of
products
450
400
350
300
250
200
150
100
50
0
preclinical
phase 1
phase 2
phase 3
product's stage of development at licensing
NDA filed
Licensing is occurring at later and later stages over time
PRODUCT’S STAGE OF DEVELOPMENT AT LICENSING OVER TIME
proportion
at
stage
100%
90%
80%
70%
preclinical
phase 1
60%
phase 2
50%
phase 3
40%
NDA filed
30%
20%
10%
0%
1980-1984
1985-1989
1990-1994
1995-1999
period
2000-2004
2005-2009
In a third of cases the biotech firm retains some territories, but territories retained
equally distributed across majors
TERRITORIES LICENSED IN INITIAL TRANSACTION
% licenses
including
territory
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Worldwide
US
Japan
EU
China
In addition to territories, the major licensing terms are the financial terms, the equity
structure, and the commercialization arrangement
DEAL TERMS
− Financial terms
• Upfront payments: paid in cash on signing
• Milestone payments: paid on accomplishment of certain milestones
• Royalty rates: paid as percentage of sales after launch
• [Also equity payments and R&D payments]
− Equity structure
• Equity agreement: licensee takes equity stake in innovating firm
• Joint venture
− Commercialization arrangement
• Co-Development: innovating firm participates in product development
• Co-Promotion: innovating firm participates in product marketing & distribution
Contracted upfront payments are typically in range of $5-100M while milestone
payments range $20M-$1B
UPFRONT VS MILESTONE PAYMENT TERMS
number
of
products
50
45
40
35
30
25
20
15
10
5
0
payment amount ($US2008M)
upfront payments
milestone payments
Effective royalty rates range from 5% to 25% of net sales
EFFECTIVE ROYALTY RATES (AT $200M SALES)
number
of
products
25
20
15
10
5
0
0-5
5-10
10-15
15-20
20-25
effective royalty rate (% net sales)
25-30
30-35
Upfront and milestone payments are relatively similar regardless of the stage clinical
development licensed but royalty rates increase
AVERAGE FINANCIAL TERMS BY PRODUCT’S STAGE OF DEVELOPMENT AT LICENSING
effective
royalty
rate (%)
25
payment
amount
($US2008)
300
250
20
200
15
150
10
100
5
50
0
0
preclinical
phase 1
upfront payments
phase 2
milestone payments
phase 3
NDA filed
effective royalty rates
Payment terms have increased steadily over time
AVERAGE FINANCIAL TERMS OVER TIME (1980-2009)
payment
amount
$US2008)
effective
royalty
rate (%)
350
18
16
300
14
250
12
200
10
150
8
6
100
4
50
2
0
0
1980-1984
1985-1989
upfront payments ($US2008)
1990-1994
1995-1999
2000-2004
milestone payments ($US2008)
2005-2009
effective royalty rates
Licensee often takes an equity stake in innovating firm when licensing early stage
products but less likely with later stage products. JV arrangements are relatively rare.
EQUITY STRUCTURE BY PRODUCT’S STAGE OF DEVELOPMENT AT LICENSING
number
of
products
450
400
350
300
250
200
150
100
50
0
preclinical
phase 1
phase 2
licensee takes equity stage in innovating firm
phase 3
joint venture
NDA filed
Innovating firms are more likely to retain rights to participate in commercialization
process when licensing at later stages in product’s development
COMMERCIALIZATION STRUCTURE BY PRODUCT’S STAGE OF DEVELOPMENT AT LICENSING
number
of
products
450
400
350
300
250
200
150
100
50
0
preclinical
phase 1
phase 2
co-development
co-promotion
phase 3
NDA filed
Co-development and co-promotion arrangements have become more common over
time
COMMERCIALIZATION STRUCTURE OVER TIME (1980-2009)
number
of
products
250
200
150
100
50
0
1980-1984
1985-1989
1990-1994
co-development
1995-1999
co-promotion
2000-2004
2005-2009
Interview evidence suggests biotech firms use co-development & co-promotion
arrangements primarily as a way to acquire their own commercialization capabilities
REASONS FOR NEGOTIATING JOINT COMMERCIALIZATION ARRANGEMENTS
− Biotech firms have difficulty capturing value from innovation merely through licensing
• Licensing gives up control of the commercialization process to pharma firm
• Firm that sells the product appropriates lion’s share of returns
− Resource constraints prevent a start-up biotech firm from commercializing alone
• Existing competencies of established pharma firms give them advantage in commercialization
• Venture capitalists unwilling to fund large sunk investment in developing commercialization expertise
− Co-development/co-promotion enables biotech firm to access pharma’s commercialization expertise
for current innovation AND acquire knowledge to commercialize future innovations alone
• Pharma’s knowledge of commercialization is experiential, tacit and organizationally embedded
• Participating in commercialization enables biotech to watch and learn under pharma’s guidance
Results of empirical analysis show innovating firm retains commercialization rights
when product is more closely related to strategic focus
RESULTS FROM EMPIRICAL ANALYSIS
− Biotech more likely to retain co-promotion rights
when …
• Biotech firm’s other R&D activity is focused on
same disease field as the product
• Biotech firm does not have commercialization
capabilities in ANOTHER disease field
• Biotech firm is in a stronger financial position
• More pharmaceutical firms competing in disease
field of the product
Source: “Profiting from Technological Capabilities: Technology Commercialization Strategy in a Dynamic Context”
22
Econometric analysis reveals that innovation firms take short-term risk in retaining
co-development but those that survive receive long-term benefit
ECONOMETRIC RESULTS: SHORT-TERM COSTS VS LONG-RUN BENEFITS
probability
of
approval
0.35
0.3
0.25
16%
0.2
0.15
0.7%
0.1
0.05
0
straight licensing co-development
firms with no clinical experience
firms without co- firms with codevelopment
development
experience
experience
firms with clinical experience
Source: David Hsu & Simon Wakeman, “Costs and Benefits of Learning through Alliances for Entrepreneurial Firms”
Entering joint commercialization arrangement may enable innovating firm to
overcome disadvantaged position
CONCLUSION
− Licensing …
• Maximizes likelihood of success in the short term
• Firm remains in disadvantaged position with respect to commercializing future innovations
− Self-commercialization …
• Typically not feasible in short term
− Joint commercialization …
• Benefits from product firm’s superior capabilities in short term (relative to self-commercialization)
• Enables firm to acquires experience that enables self commercialization over long term
• More worthwhile if likely to commercialize more innovations in product field in future
• More feasible if multiple product firms competing to license the innovation
• Only possible if has sufficient financial strength to forego income on current innovation
If innovating firm does not have commercialization capabilities then must make tradeoff between short-term
need for cash and long-term benefits of building own commercialization capabilities