The Association of Corporate Counsel hosted its annual Life Sciences Conference from May 9-11, 2023, which featured presentations from a variety of law firms and life sciences industry experts on several topics. The Freshfields U.S. Life Sciences Transactions team was an active participant in the conference—Freshfields’ Partners Adam Golden (New York), Vinita Kailasanath (Silicon Valley), and Scott Blumenkranz (Silicon Valley), together with Jennee DeVore of Inflammatix, a diagnostics-focused biotech, presented on the points that biotechs should consider when they’re deciding among deal structure(s) they want to leverage as part of their growth strategy. Some of the high points were:
Financing – While biotechs have a variety of options available to them when considering how to structure a financing transaction, they most commonly use preferred stock, convertible promissory notes, and warrant instruments. Each instrument has unique considerations—including with respect to valuation impact, board representation, and accompanying contractual rights—that biotechs should consider when determining what makes sense given their particular circumstances and long-term growth strategy.
License/Collaboration –Biotechs also may structure a license/collaboration deal in a number of ways, including as an out-license of rights to a specific program, a joint research collaboration with funding provided by its counterparty, or a co-development/co-commercialization deal focused on a specific asset. While each deal is unique, in a typical license/collaboration deal between a commercial-stage pharmaceutical company and a biotech, each side has different priorities. For example, pharmaceutical companies usually want to maximize control over the relevant program, while biotechs typically want to ensure they retain flexibility to pursue other pipeline programs and that, if the deal terminates, the licensed asset will be returned to the biotech so they can take it forward—either independently or with another partner.
In these types of deals, financial terms, diligence, and termination provisions should be given particular attention. For instance, triggers for milestone payments, as well as royalty payment reduction provisions, should be drafted carefully, as the concepts can be quite complex. In addition, diligence obligations are often highly negotiated, as these provisions are a key vehicle through which the biotech licensor can attempt to ensure its partner devotes sufficient time and resources—and appropriately prioritizes—the licensed program. This also makes diligence provisions a source of potential disputes between the parties. Finally, consequences of termination can be detailed and often not the parties’ primary focus at the start of a deal, but need to be carefully considered to avoid disputes and the need for future negotiation if the agreement is terminated.
Program Acquisition – Pharmaceutical companies often seek the targeted acquisition of a biotech’s assets related to a specific program—as opposed to a license to the biotech’s intellectual property rights. This deal structure enables the pharmaceutical company to obtain full control of the relevant program, subject to any diligence obligations, while also allowing the biotech to retain control over its other pipeline programs and to gain a source of non-dilutive financing.
M&A – While M&A deals can be attractive to biotechs who are seeking an exit opportunity for their investors and for pharmaceutical companies who seek to obtain control over the biotech in its entirety, there are important liability and tax considerations for both parties that should be carefully considered. In a market where buyers and sellers seek creative ways to align on value, milestones/CVRs and spin-offs are among the tools to consider to bridge these gaps. In addition, the current antitrust environment has led to increased focus by parties on related risk allocation provisions given heightened scrutiny by regulators.
Options – Another way to bridge valuation gaps and enable a program to mature prior to a decision on whether to transact is to use an option—to license, to acquire assets, or to acquire the entire company. The option typically has pre-negotiated terms, which often include an up-front option fee that the biotech can use to fund research and development through the option exercise trigger. From the pharmaceutical company’s perspective, the option structure allows it to agree to economic terms prior to the target program’s next value inflection point and permits it to exercise some influence on the biotech during the pendency of the option before the option-holder receives the license or assets. From the biotech’s perspective, the structure allows it to retain control prior to option exercise and gain a source of non-dilutive funding, but since the economics of the deal are pre-negotiated, the option essentially caps the value of the company. As with all deal structures, tax implications must be carefully considered.
As the presentation illustrated, biotechs have a lot of tools at their disposal when charting a path to their growth and success. Please reach out to your Freshfields contact or one of the presenters if you’d like to discuss any of these structuring options in more detail.