Pfizer announced on Thursday its decision to discontinue sales of its new inhaled insulin drug Exubera.

Exubera was developed by San Carlos-based Nektar Therapeutics, which licensed the drug to Pfizer.   According to the Philadelphia Business Journal, Pfizer plans to transfer the rights to Exubera back to Nektar Therapeutics and take a “$2.8 billion charge to dispose of its interests in it.”

The Philadelphia Business Journal reported:

Pfizer at one time said Exubera, approved about two years ago by the Food and Drug Administration, would be a $2 billion-a-year drug, but it was slow in rolling out the marketing of the drug and its device, which was criticized by doctors and insulin users as being too bulky.

So what happened to cause Pfizer to pull the plug on Exubera?

The San Jose Mercury News reported on the background to this decision as follows:

Because 21 million Americans have diabetes and many of them dislike injecting insulin, Exubera – the first-ever inhaled insulin system for adults – was widely expected to be a blockbuster. . . . But despite a recently launched TV ad blitz by Pfizer, the product has been a major disappointment. Although Pfizer has been vague about overall sales, the company revealed that Exubera’s revenue for the second quarter of this year was a mere $4 million. Some people attribute Exubera’s dismal sales to the fact that it is more expensive and complicated to use than injectable insulin. Figuring out the proper dose of Exubera also is somewhat different than with injectable insulin. And because Exubera can hinder lung function in some cases, anyone using it is supposed to get a lung test first. In addition, some doctors complain that a daily dose of Exubera costs at least twice as much as the injectable variety and that some insurance companies won’t pay for it.  But others fault Pfizer for not manufacturing it quickly enough, trying to market it initially with an ill-prepared sales team and delaying its ad campaign until this summer.

The Wall Street Journal Online reported on Pfizer’s decision as follows:

Drug companies often cancel drugs during human trials, and occasionally after they go on the market if there are any red flags about safety. But to pull a new drug from the market because it didn’t sell — in the absence of a red flag — is almost unprecedented.

“This is one of the most stunning failures in the history of the pharmaceutical industry,” said Mike Krensavage, an analyst at Raymond James & Associates. “I hope it would give Pfizer pause about buying any more assets.”

Pharma Marketing Blog took the analysis of Pfizer’s decision one step further and compared the failure of Exubera to the sinking of the Titantic:

There are plenty of . . . similarities between Exubera’s failure and the failure of the “unsinkable” Titanic. I am specifically talking about Pfizer’s hubris and marketing’s poisoned Kool Aid. Like the builders of the Titanic, the Exubera marketers felt they had an “unsinkable” product that would quickly reach blockbuster status and make the company a bundle.

It is unclear to date as to the exact terms and conditions of the Nektar Therapeutics license agreement, but the Wall Street Journal Online described Pfizer’s action as a “termination” of the license agreement for a definitive price, and The Mercury News reported that Nektar Therapeutics will have the ability to sell and market the Exubera itself on an ongoing basis.  Thus, there is reason to believe that Pfizer’s decision constituted the termination of an exclusive licensing agreement, and that the parties had previously agreed in writing to the specific damage amount to be paid to Nektar Therapeutics in the event of termination.

Apparently, however, Nektar Therapeutics is still recovering from the shock it received yesterday with Pfizer’s announcement, and has yet to announce its future plans for the drug.  The Wall Street Journal Online reported:

The news that Pfizer was abandoning Exubera came as a surprise to Nektar of San Carlos, Calif., from which Pfizer licensed Exubera. Nektar issued a scathing news release late yesterday accusing its partner of a poor marketing job and of not alerting Nektar it would be terminating their licensing deal. Pfizer says it told Nektar of its plans minutes after releasing the news, because the announcement was material for both companies.

The Wall Street Journal Online points out that, even if Nektar Therapeutics does try to move forward with the commercialization of Exubera, questions remain as to the safety and overall viability of inhaled insulin products:

[T]he market for other inhaled-insulin products still in development [is up in the air]. Part of Exubera’s problem — the safety concerns that come with inhaling a drug — will be hard to surmount for any product that goes into the lungs, in the absence of long-term data. There is also the question of whether patients want to inhale insulin, or are really resistant to needles.  In the 11 years since Pfizer bought into the idea, insulin pens have made injecting the drug less painful than the traditional needle and syringe.

The Exubera debacle shines a spotlight on the role of the medical community in determining whether a novel technology is a success or a failure.  While there is no doubt that a variety of factors contributed to the product’s failure, clearly Pfizer did not focus adequately on addressing the concerns of the medical community in its attempt to bring Exubera to market.  Too many lingering questions about the product and its delivery system remain, and my suspicion is that the conservative medical community urged patients to stick with the tried and true products rather than to give Exubera a try.  In all likelihood, the fact that the product was more expensive than the other options on the market was just the icing on the cake.

The Silicon Valley Chapter of Licensing Executives Society ("LES") recently sponsored an event in whch representatives from Stanford and the University of California ("UC") offered tips on licensing with the Stanford and UC systems.  Katharine Ku of Stanford University and Viviana Wolinsky of Lawrence Berkeley National Laboratory each gave an excellent presentation, outlining their respective university’s policies and procedures, as well as some of the issues of concern currently facing each organization.  Nader Mousavi of Wilmer Hale, which hosted the event, also participated.

What were some of the insights on their employers’ respective licensing programs that the two speakers shared?

Regarding the issue of exclusive licensing terms, Ku indicated that Stanford prefers fixed terms of exclusivity.  In contrast, Wolinsky indicated that UC is generally more willing than Stanford to agree to exclusive licenses that run for the full term of the patent.

On the issue of royalty rates, the speakers agreed that the range often runs from 3 to 6 % of net sales.  Wolinsky shared that the UC system is willing to consider royalty stacking, if this is brought up in the negotiations, and that UC may be willing to reduce the royalty rate on each license to half of what would otherwise be agreed to. 

On the issue of sublicensing, the speakers agreed that a royalty based on net sales from sublicensees is the current standard for UC and Stanford license agreements, replacing the once-common standard of a royalty based on sublicense income (which, in all honesty, I have never seen used in the licensing negotations I have been involved with).  The panel advised that in cases where sublicense income is used as the standard for the sublicensing royalty rate that the following should be excluded: research and development payments, equity, patent reimbursements, other research and development materials and equipment, and the fair market value of cross-licenses. 

The speakers highlighted an important distinction in how UC and Stanford prefer to handle patent prosecution in exclusive licenses.  The UC position is that the university controls all patent prosecution, whereas the preferred Stanford position is that the licensee controls all patent prosecution.  In both cases, the universities require that the exclusive licensee pays for the costs; however, UC prefers that the licensee reimburse UC for the patent prosecution costs, whereas Stanford prefers that the licensee pay the costs directly.

How do the universities deal with patent enforcement?

Ku indicated that Stanford’s default position is that Stanford has the right to enforce the patents, and that the licensee can step in if Stanford declines to enforce the patents.  Ku further stated that if the licensee enforces the patents, any damages recovered should cover costs first and then the balance should be treated as net sales/sublicense income. 

In contrast, Wolinsky stated that UC’s default position is the same as Stanford’s position, except that any damages recovered should go to the party bringing suit. 

Both Stanford and UC require university consent prior to any settlement, and provide the right to name the university as a party for standing.

How are Stanford and UC dealing with the recent MedImmune v. Genentech decision?

UC is taking the most unforgiving position on this issue.  According to Wolinsky, the position is that UC is drafting language into the license to state that if a licensee disputes the validity of a patent, the patent terminates.

In contrast, the Stanford position is a little more tolerant: Stanford is drafting language into the license to state that if a licensee disputes the validity of a patent, the licensee has to pay all costs.

Regarding other issues in the news, both Ku and Wolinsky indicated that the universities were very concerned about the prospect of patent reform, particularly with respect to the proposed changes to the "First to File" Rule.  Ku and Wolinsky also stated that both systems were now adding export control language to their NDAs as well as licenses.  Finally, with respect to sponsored research, Ku indicated that the Stanford policy is that the university is declining to set a royalty rate for inventions arising out of sponsored research, whereas Wolinsky indicated that UC continues to agree to a royalty rate range.

All in all, Ku and Wolinsky gave a very informative presentation on current licensing policies at their respective institutions.  After attending this presentation, however, I now find myself wanting to hear more from other universities on their current policies and procedures on licensing.  So, I am formally issuing an invitation into the blogosphere to any other universities who would like to share information to prospective licensees on their current licensing policies, procedures, and negotiating strategies: please share with us any insights on licensing at your schools, and this blog will gladly provide you a platform to publish that information to the biotech and licensing community.   I welcome your commentary. 

Biotech companies continue to rely on mergers & acquisitions over IPOs as a primary exit strategy, according to a new report by the San Diego Business Journal.

The San Diego Business Journal reported:

Normally, we can get a better valuation by doing a trade, sale or merger than an initial public offering,” said Ivor Royston, managing partner and founder at Forward Ventures. “We get better returns. I see a continuation of mergers and acquisitions that has been so dominating over the last two years. We just don’t see that many IPOs" . . . .

Royston, who was a founding partner of the former Hybritech, the first San Diego biotech, said large pharmaceutical companies are increasingly interested in acquiring startups as their pipelines run dry.

“Drugs are going off patent, and there is stifled innovation,” Royston said. “There are good relations now going on between private biotech and large pharmaceutical companies.”

Despite the continued trend toward reliance on mergers & acquisitions to cash out, the biotech industry has seen some IPO activity in the last year.

The San Diego Business Journal further reported:

The value of IPOs in the biotech industry in 2006 was $944 million, up 50 percent over 2005, according to the Ernst & Young 2007 Global Biotechnology Report.

But just $80 million, or 8.4 percent, of the total raised by companies going public in 2006 came from the San Diego region. Cadence Pharmaceuticals Inc. and SGX Pharmaceuticals Inc. were the only two [San Diego] biotech IPOs in 2006.

The San Francisco Bay Area had twice as many in 2006, according to the report, raising a total of $211 million — making up 22 percent of the amount raised by biotech IPOs in the nation last year.

IPOs in the Mid-Atlantic region and New England each made up 20 percent of the nationwide total raised from stock offerings in biotech.

The San Jose Business Journal’s report is consistent with what I have always seen in the biotech industry–that the ultimate plan of most biotech companies is to sell the company.   Of course, in recent years, high tech companies have been following a similar strategy.  IPOs in the Silicon Valley have been few and far between, but there have been many transactions by merger or acquisition.  So, for many companies across the board, mergers and acquisitions rather than IPOs have become the preferred manner by which to raise capital or exit the business. 

Will this trend continue?  My prediction is a definite "yes."  While I think IPO activity is starting to pick up and there may be more IPOs in the biotech industry as well as other industries in the coming year, I predict that mergers and acquisitions will continue to be the primary exit startegy for biotechs for many years to come. 

Biotech companies continue to rely on mergers & acquisitions over IPOs as a primary exit strategy, according to a new report by the San Diego Business Journal.

The San Diego Business Journal reported:

Normally, we can get a better valuation by doing a trade, sale or merger than an initial public offering,” said Ivor Royston, managing partner and founder at Forward Ventures. “We get better returns. I see a continuation of mergers and acquisitions that has been so dominating over the last two years. We just don’t see that many IPOs" . . . .

Royston, who was a founding partner of the former Hybritech, the first San Diego biotech, said large pharmaceutical companies are increasingly interested in acquiring startups as their pipelines run dry.

“Drugs are going off patent, and there is stifled innovation,” Royston said. “There are good relations now going on between private biotech and large pharmaceutical companies.”

Despite the continued trend toward reliance on mergers & acquisitions to cash out, the biotech industry has seen some IPO activity in the last year.

The San Diego Business Journal further reported:

The value of IPOs in the biotech industry in 2006 was $944 million, up 50 percent over 2005, according to the Ernst & Young 2007 Global Biotechnology Report.

But just $80 million, or 8.4 percent, of the total raised by companies going public in 2006 came from the San Diego region. Cadence Pharmaceuticals Inc. and SGX Pharmaceuticals Inc. were the only two [San Diego] biotech IPOs in 2006.

The San Francisco Bay Area had twice as many in 2006, according to the report, raising a total of $211 million — making up 22 percent of the amount raised by biotech IPOs in the nation last year.

IPOs in the Mid-Atlantic region and New England each made up 20 percent of the nationwide total raised from stock offerings in biotech.

The San Jose Business Journal’s report is consistent with what I have always seen in the biotech industry–that the ultimate plan of most biotech companies is to sell the company.   Of course, in recent years, high tech companies have been following a similar strategy.  IPOs in the Silicon Valley have been few and far between, but there have been many transactions by merger or acquisition.  So, for many companies across the board, mergers and acquisitions rather than IPOs have become the preferred manner by which to raise capital or exit the business. 

Will this trend continue?  My prediction is a definite "yes."  While I think IPO activity is starting to pick up and there may be more IPOs in the biotech industry as well as other industries in the coming year, I predict that mergers and acquisitions will continue to be the primary exit startegy for biotechs for many years to come. 

I happened across an article this weekend on biotech licensing, which I would recommend to any readers who are contemplating licensing negotiations in the near future.

The article, "Biotech Patent Licensing: Key Considerations in Deal Negotiations," was written by Jeffrey P. Somers, an attorney at the Massachusetts firm of Morse Barnes-Pendleton, PC.  I thought Jeffrey did did an excellent job of capturing the essence of biotech licensing and the issues that must be considered in drafting and negotiating a biotech license. 

Jeffrey’s article addresses five topics of interest: (i) field of use restrictions; (ii) the multi-purpose compound; (iii) special issues related to non-exclusive licenses; (iv) the payment term; and (v) rights to the drug master file upon early termination of the license.  His article also provides practice tips related to each of the topics. 

While Jeffrey issues a disclaimer in his article that his background is in representing the pharmaceutical company and that he is therefore biased toward that perspective, this article should be informative to both sides of the negotiating table. 

 A Kansas City Business Journal report, citing a report released by the Ewing Marion Kauffman Research Foundation, concludes that  a "’home run mentality’ in university technology transfer offices may be keeping many valuable research projects from reaching first base in the commercialization process."

The Kansas City Business Journal stated:

According to the report, universities tend to focus their limited technology-transfer resources only on the patenting and licensing of technologies that promise big, fast paybacks.

The report — written by Kauffman researchers Robert Litan, Lesa Mitchell and E.J. Reedy — argues that universities should shift from a sole focus on that patent/licensing model, which seeks to maximize income, to a volume model. A volume model emphasizes the number of innovations that university research generates and the speed at which those innovations are commercialized.

The Report outlined four volume models as follows:

• Free agency model: Faculty members have the power to choose a third party (or themselves) to negotiate license agreements for entrepreneurial activities, provided they return some portion of their profits to the university.
• Regional alliances model: Multiple universities form a consortium that develops mechanisms for commercialization. Economies of scale allow for lower costs of the commercialization function overall, and the universities are able to share costs among multiple participants. This model may prove particularly attractive for smaller research universities, which may not have the volume to support a seasoned and highly able licensing and commercialization staff independently. 
•  Internet-based model: Closely related to the regional alliance model, Internet-based approaches use the Web to facilitate commercialization. The iBridge Network, a program funded by the Kauffman Foundation that works with a consortium of universities, is an example of such a model.
• Faculty loyalty model: This calls for universities to consider giving up their intellectual property rights, anticipating instead that loyal faculty will donate a portion of their commercialization proceeds back to the university.  

The argument raised is an interesting one–there is a good argument that the focus of universities should be on commercializing good research for the societal good rather than making as much money as possible with "home runs".  From a commercial perspective, "home runs" make good business sense, but universities take pride in their higher purpose and there is certainly a good argument that tech transfer policies should reflect this higher purpose. 

Business Week Online ran an interesting article this week on a new trend in the biotech world: private equity investing. 

According to Business Week Online, "at first blush, private equity and biotech make for an odd marriage."  Business Week explains as follows:

The biotech industry is famous for unstable cash flows and massive research-and-development budgets that produce many more flops than blockbusters. Private equity players aren’t known for their patience, either, and successful drugs often take decades to come to market. No amount of financial engineering can speed up the science. Still, some private equity players think they can earn big returns in the sector, even though it means investing in R&D.

The article goes on to say that, to date, the deals have been limited to businesses that have steady cash flow streams or have found ways to keep the money flowing; however, the article concedes that another play is "finding outfits that provide services to biotech scientists and thus don’t have huge research tabs." 

As Business Week Online  points out, the market for private equity could be tremendous in the biotech industry.   Indeed, the article states as follows:

Such biotech treasures could be plentiful for private equity. Stephen Evans-Freke, managing general partner at Celtic Pharmaceutical Management, a private equity firm specializing in the sector, estimates that half of biotech’s 300-odd publicly traded companies have a market value of less than $250 million—a size that makes it tricky to raise extra cash. On top of that, there are 1,000 or so privately held biotech enterprises, many of which have been struggling to pull off a public offering since the 2001 market crash. . . .

The article raises some interesting points.  It would be interesting to know just how much this trend has really taken off.  Could private equity really be another option for biotechs who aren’t quite ready for an IPO? 

Raptor Pharmaceutical Inc., an early stage biotechnology research and development company owned by Novato-based Raptor Pharmaceuticals Corp., has announced that it has signed an exclusive, worldwide license agreement with Washington University in St. Louis for the use of Mesd reagents for therapeutic treatment of cancer and osteoporosis.  Mesd  is a chaperone protein needed for the proper folding of the signal transduction receptors LRP5 and LRP6.

The St. Louis Business Journal reported that Raptor intends initially to test the potential of Washington University’s Mesd-based peptides for the treatment of cancer and osteoporosis, and that CEO of Rapto Pharmaceuticals Corp., Dr. Christopher Starr explained the agreement as follows:

"Mesd significantly adds to our growing franchise in the drug targeting area. . . . Mesd complements and extends our current programs and we believe will increase our reach and capabilities into a number of under-served disease indications with substantial market potential."

Foster City based Applied Biosystems announced last Tuesday that it has signed an agreement with Eagle Research and Development LLC in which the parties agreed to collaborate on a single molecule detection device developed by Eagle.  Applied Biosystems reported that it has received an exclusive two year option to license the technology.

According to the San Jose Business Journal:

"Eagle’s technology, currently in prototype stage, identifies and quantifies molecules based on their unique electronic charge signatures. Applied Biosystems said the technology could have significant implications for advancing personalized medicine based on its potential for faster, more efficient and less expensive protein and nucleic acid identification, protein-protein and protein/small molecule interaction measurements, and DNA sequencing."

If you missed the recent blogpost by Stephen Albainy-Jenei, What’s a Reasonable Royalty Rate?, I urge you to check it out. Stephen addressed the question I know that many transactional lawyers like me struggle with: what exactly is a reasonable royalty rate in any particular transaction?

While Stephen acknowledges that Organizations like the Association of University Technology Managers (“AUTM”) and the Licensing Executives Society (“LES”) publish lists and statistical analyses of royalty rates, Stephen says of those publications:

Granted, using an established royalty rate shown in certain guides sounds good since these are derived from prior actual licenses for comparable products. The rates in the guides come from negotiation and paid by a sufficient number of licenses. As with reasonable royalty, an established royalty rate derives from the outcomes of willing parties licensing without the threat of a suit, or resultant from litigation. These rates are reflective of the profitability of industry segments. Correspondingly, what might pass muster for an established royalty depends upon the definition of a market segment. Commodity items tend to garner a relatively low royalty rate, just shy of 3%, consumer goods 5%, while software garners around 7-8%. But generalities don’t tell you anything about your particular deal.

So, if you can’t rely on particular guides to tell you what is reasonable, how do you ever really know what is reasonable? Stephen says to this point:

A reasonable royalty rate is often based on economic sense by utilizing a financial model which relates the investment required to develop a therapeutic technology to the income generated by such technology. What does that mean? It means you have to have a good business plan in place before you can talk turkey on royalty rates. And I don’t mean those wildly inflated fluffy business plans that companies create showing revenue in colorful logarithmic growth charts to impress potential investors. No, I mean a real, down-to-earth, cold shower type of business plan that takes into account all of the pain and suffering that could be encountered along the way.

Stephen shares with us some examples, but in the end, he seems to come back to the fact that the reasonable royalty rate is a somewhat amorphous concept, which is, of course, is basically how most of us have been answering the question when it is posed to us. We give the classic “it depends” answer, which is sure to drive the non-lawyer public nuts everytime they hear it. Still, Stephen has some interesting royalty rate negotiation insights that he shares in his blogpost, which are quite helpful, so even if he provides no definitive answer to the issue, I would definitely urge you to take a look at it.