VANCOUVER, British Columbia - Biotech partnering can be like a game of Texas hold ’em, in which each player lays down his chips and hopes his two cards and the flop amount to a something as grand as a full house or royal flush.

Everybody wants a share of the pot, but in gambling, only one party wins.

It doesn’t have to be that way when a biotech company allies itself with pharma. The company might have a promising product and lots of intellectual property to protect it, but the three unknowns - development, regulatory action and marketing - can hold the company back from negotiating a good deal. But there’s a different, more lucrative (albeit more risky) model to consider: Biotech firms retaining co-development, co-promotion or profit-sharing rights or options, which can mean a larger share of the pot.

And it involves no bluffing - just straight, highly scrutinized contracts built by companies like San Francisco-based Cooley Godward LLP.

Partners at the firm discussed the details, risks and pitfalls, as well as the key advantages, to deal-making at the 4th annual BioPartnering North America Conference here last week.

"Why do these deals?" asked Barclay Kamb, a partner at the firm. "Because they do add complication. They do add risk."

But biotech companies often want experience with development and marketing, as well as "better economics" and more value, he said.

Wall Street has been placing higher value "more and more these days" on integrated companies, Kamb said, adding that the most attractive firms for investors are the ones that retain product rights and have top-line revenues.

But there are challenges to closing those types of deals. Pharmaceutical companies often do not want greater biotech involvement in later-stage development. And more importantly, "pharma does not need your money," said Jane Adams, a partner at Cooley Godward.

Another concern is the obligation factor. Once biotech enters a 50/50 co-development deal with pharma through Phase III trials, what happens if it can’t meet its end of the bargain?

Biotech may choose to have a hard-dollar cap on what it will fund, but a more likely scenario would be obtaining an opt-in or opt-out right, even if pharma expects in return a premium for its initial risk. Pharma may demand a sliding-scale royalty depending on the time and money put into development by the biotech company, but an opt-out right can protect a biotech company from the termination provisions of the contract.

A classic example of a co-development agreement was signed in the spring last year between Anadys Pharmaceuticals Inc., of San Diego, and Novartis Pharma AG, of Basel, Switzerland, to advance ANA975 and other Toll-like receptor 7 oral prodrugs for chronic hepatitis C and hepatitis B viruses. In that deal, worth up to $570 million, Anadys agreed to pay 19.5 percent of the global development costs, and it had a co-promotion option to retain 35 percent of U.S. profits by contributing 35 percent of commercialization costs. If it does not exercise the co-promotion option, it would receive high double-digit royalties on net U.S. sales. (See BioWorld Today, June 3, 2005.)

But biotech firms choosing to co-develop must consider how it will fund those costs. Pharma may provide the answer with an equity investment or a loan or credit facility, sometimes offering forgiveness of the debt on achievement of certain milestones.

Anadys did not receive an equity investment in its deal with Novartis, but did get a $20 million initial license payment and is entitled to a potential $550 million in regulatory and commercial milestone payments. At the time the deal was signed, Anadys said it would not need to finance operations for at least 24 months.

Considering Sales Force?

There’s an important point to consider with those types of arrangements, said Cooley Godward Partner Marya Postner.

"A sales force is not necessarily an asset," she said. "You need to have enough assets to make a sales force viable."

As in co-development negotiations, however, an opt-in approach to co-promotion may be the way to go, considering Wall Street seems to reward options as much as rights in this area, she said, stressing that a right "is an obligation."

Wall Street loved the Anadys deal, and the company’s stock (NASDAQ:ANDS) shot up 23.8 percent, or $1.61, the day it was announced, to close at $8.37. Friday it closed at about $11 per share.

The most ideal co-promotion arrangement for biotech is when the costs come off the top line of product revenue. If a company has to support 25 percent of the sales force before receiving any money, it needs to "pre-negotiate the ability to get out of the co-promotion option," Kamb said.

But a major advantage to co-development and co-promotion often is profit-sharing, assuming the risk pays off.

Unfortunately for companies opting out of co-development and co-promotion, the "fallback" position often is royalties, said Ken Krisko, an associate at Cooley Godward.

If a biotech company manages to get profit-sharing rights, it has to consider the costs associated with the rights, the costs for sales forces, manufacturing, process development, plant start-ups and product launches. Initially, the company may only see losses.

"Those losses can be significant. They can take many, many years to recover," Krisko said.

A contract should map out exactly how those costs will be shared, and biotech firms should consider another thing: Pharma often requires terminating provisions in case a competitor acquires the biotech company.

"These are complicated structures," Kamb said. "Be careful."

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