Topic 22 Strategic Alliances

WIPO-KIPO-KIPA IP Panorama Business School Investment Summit 10 October 2008 Geneva

OPTEON
Philip Mendes Level 3, 33 Queen St Brisbane QLD, Australia Ph + 61 7 3211 9033 Fax + 61 7 3211 9025 philip@opteon.com.au

Outline
Commercialisation of IP

License

Strategic Alliance

Co-Development

Co-Marketing

Passive

Partnership

Outline
Commercialisation of IP

License

Strategic Alliance

Co-Development
1 00

Co-Marketing

9 0

Sk IP
1 2 3 4 5 6 7 8 9 1 0

1 00

9 0

8 0

8 0

7 0

7 0

6 0

6 0

5 0

5 0

4 0

4 0

3 0

3 0

2 0

2 0

1 0

1 0

1 0

Passive features of a license

 Licensor grants exploitation rights to a licensee  Licensee pays royalties and other remuneration to the Licensor  Licensor is passive  Has no further exploitation rights  Licensor has no need to actively do anything  Licensor passively sits by and collects royalties

Licensor
IP

Licensee

Strategic Alliance

Strategic Partner

Strategic Partner

 In a strategic alliance both parties contribute to their joint venture their respective resources and capability  Aim is to add greater value to their respective positions  By doing so, to  Increase their financial return  To access the capability of their partner which they themselves lack  To acquire skills that they themselves may lack

Co-Development Agreements Co-Marketing Agreements

 Co-Development Agreement  Partners collaborate scientifically to further develop the IP  Take the IP further along the development path  Licensor increase the value of the IP as a result of the collaboration  Co-Marketing Agreement  Partners co-market the products of their alliance  One may manufacture only, and the other may sell products only  They may sell products competitively in the same territory  Or, they may sell in different territories  Licensor retains some marketing rights, achieving greater financial upside

Strategic Alliance Financial Terms

 Strategic Alliance Financial Terms 1. Payment of research monies 2. Purchase or lending of assets (which has a monetary value) 3. Provision of expertise (which has a monetary value) 4. Collaborative research (which has a monetary value) 5. Loans 6. Equity subscription 7. Convertible notes Strategic Alliance other financially valuable terms 8. Acquiring new skills 9. Acquiring new technology 10. Creating new technology

Strategic Alliance Financial Terms

 Payment of research monies  Licensee pays an agreed amount for research and development to be continued by Licensor  Licensor owns the New IP that results of that further R&D  New IP may be jointly owned  Different categories of New IP may be solely owned by the Licensor and Licensee  Licensee may pay research monies at an FTE rate that the Licensee is accustomed to pay  Licensor may do the research more cost effectively, and profits from the contract research

Strategic Alliance Financial Terms

 Provision of assets and expertise  To assist the further R&D:  Licensor may purchase an asset (lab equipment) and give it to the Licensor  Licensee may lend an asset, which is returned to the Licensee at the completion of the research  Licensee may provide expertise, giving the Licensor access to that expertise  All of these have a monetary value to the Licensor  Licensor receives something of value which is required, without having to pay for it

Strategic Alliance Financial Terms

 Collaborative research  Licensor and Licensee collaborate in the further R&D  Each pays its own expenses in the collaboration  New IP:  Licensor owns the New IP that results of that further R&D  New IP may be jointly owned  Different categories of New IP may be solely owned by the Licensor and Licensee

 Again, the Licensor receives something of value

Strategic Alliance Financial Terms

 Loans  Licensee makes loans to the Licensor  Money lent has to be repaid, but on favorable terms  Generous rate of interest  Generous repayment arrangements  Loan may or may not be secured  Loans used by Licensor to:  Fund further R&D  Pay for its marketing and promotion expenses in a co-marketing alliance

Strategic Alliance Financial Terms

 Equity Payments  Licensee subscribes for shares in the Licensor  Share subscription monies used to  Fund further R&D  Pay for its marketing and promotion expenses in a co-marketing alliance  Not repayable  Licensee acquires an equity stake in the Licensor, and therefore has an equity stake in the Licensors financial benefits under the terms of the license

Strategic Alliance Financial Terms

  Convertible Notes A Convertible Note is a loan, which either  Is repaid by money, or  Is repaid by the issue of shares in the receiver of the loan (the Licensor) Election as to repayment or satisfaction with equity is made by:  Licensor only, or  Licensee only, or  Either licensor or licensee Loan monies used by Licensor to:  Fund further R&D  Pay for its marketing and promotion expenses in a co-marketing alliance

Strategic Alliance Financial Terms

         Genentech and Xoma Raptiva License Xoma licensed Genentech 1996 compound (FDA approved Oct 2003, now marketed as Raptiva, for psoriasis (skin condition) 1999 deal amendment: Future development costs to be shared 25% Xoma and 75% Genentech Future co-marketing costs to be shared 25% Xoma and 75% Genentech Future profits on sales shared 25% Xoma and 75% Genentech Genentech provides Xoma loan facility up to $80m to fund future development (that is, clinical studies) Genentech provides Xoma loan facility up to $15m to fund future marketing Xoma can elect to  Repay loan  Issue equity instead of repaying loan  Defer payment of up to $40m of loan against future profit share Xoma mortgages its future profit share to Genentech as security for repayment

Strategic Alliance Financial Terms

     Pluristem Life Systems and Stem Cell Innovations deal Deal announced 22 February 2007 Pluristem licenses STI PLX-I product - stems cells obtained from the placenta and expanded by using Pluristem bioreactor that mimics physiological environments Cells are immune privileged reduction or absence of rejection of the cells in a patient first application in bone marrow transplantation Deal terms:  Up front not cash - but instead 23 million fully paid shares Plurstem receives in STI  Additionally, STI issues 28 million shares to Pluristem, and Pluristem issues 66 million shares to STI  Undisclosed royalties  Undisclosed milestone payments

Strategic Alliance Financial Terms

  Pluristem Life Systems and Stem Cell Innovations deal What is achieved by:  Up front shares instead of cash  Share swap where Licensor and Licensee each obtain shares in the other ? Licensors perspective:  If technology fails and there are no sales  Licensor has shares in licensee and shares in Licensees profit across the whole of its business other than the failed technology  If technology succeeds and there are sales  Licensor gets the usual royalties and milestones  Additionally, licensees shareholders are diluted from those benefits as Licensee now holds shares, but licensors shareholders now share in licensees profits across the successful technology, as well as the Licensees other business Win Win for licensor in both cases

Greater financial returns

 In a license the licensor collects up front payments, milestone payments, and royalties, based on the value of the IP at the time that the license is negotiated  In a strategic alliance there is the prospect of  More types of financial returns  Increased financial returns of the same type  Co Development Alliance  Both parties contribute to further develop of IP to take it further along the development path.  By the licensor doing so the licensor increases the value of the Licensors IP, justifying greater up fronts, milestone payments, and royalties than just in a passive license  Co-Marketing Agreement  Licensor may earn additional financial return as a manufacturer  Licensor may earn additional financial return as a seller of products

Acquiring new skills

 In a co-development agreement the alliance partners may work collaboratively  Opportunity therefore for skills transfer  That is, the staff of one alliance partner sharing their skills with the staff of the other alliance partner, and in that way to upskill the staff of the other  May be technical skills  Skill in generating transgenic animals  Skills extracting, isolating, or synthesizing the active chemical from biodiverse resources  May be management skills  managing pre-clinical studies such as animal studies, toxicology studies etc  Managing the regulatory pathway to product registration

Acquiring new skills

 Skills transfer can occur by  Collaborative teams working side by side and learning from each other  Internships where one alliance partner trains another at its own facilities  Observation, participation, and experiencing  Skills transfer benefits both alliance partners by  Increasing the skill and capability of each others staff for the purposes of the alliance  Skills transfer benefits one partner separately  Increasing the skill and capability of one partners staff that can be used in other projects unconnected with the alliance

Acquiring new technology

 In a Co-Development Agreement one partner may make its IP available to the other  For the purposes of the collaboration  For purposes outside the collaboration  Collaboration benefits by the access to the IP of the strategic partner for the codevelopment program  Strategic partners benefit independently by access to the IP of the other for other research programs outside the collaboration  Access to research tools  Animal models, vectors, cell lines, other biological material  Access to IP to pursue areas of investigation outside the collaboration  There may be preferential rights to access New IP given to the provider of the technology  Eg, option to negotiate a license

Creating new technology

 Purpose of the Alliance is to create New IP  Builds on the licensor partners IP  May create new unrelated independent IP  Purpose of the collaboration is to build on the existing IP to further develop it and to bring a product to market  That is the ultimate aim of the collaboration by the alliance partners  Side benefit is the creation of IP that may be beneficial to one alliance partner only  That partners IP position is enhanced, and its IP capability is strengthened

Ownership of new technology

  Who should own that new IP ? Common Model #1 1. Partner A owns new IP that improves its own existing IP 2. Partner B owns new IP that improves its own existing IP 3. Partners A and B jointly own new IP outside categories 1 & 2 Common Model #2 No new IP is separately owned All new IP is jointly owned by both Partners A & B What are the implications ?

   

Ownership of new technology

 More complex models:  Partner A has a platform technology for producing vaccines against viruses  Partner B has patents in the gene sequence and function of particular virus and its interest is producing therapeutic drugs  Categories of new IP 1. New IP that solely relates to vaccine technology 2. New IP that solely relates to therapeutic drug against Partner Bs virus of interest 3. New IP that solely relates to therapeutic drug against viruses broadly 4. New IP that relates to 1 and 2 but not 3 5. New IP that relates to 1 and 3 but not 2 6. New IP that relates to 2 and 3 but not 1  How is ownership of these various categories of New IP dealt with ?  How does each partner ensure that it shares with the other what is intended to be shared, but does not prejudice its own core business by having to share new IP affecting its own core business ?

Co-Marketing
 Broad definition: encompasses two things 1. Manufacturing  Partner A may retain manufacturing rights  Upside financially by profits from manufacturing  National economic benefits  Creates investment  Creates employment  Improves balance of payments 2. Selling  Upside financially by profits from selling products  Territory  Need not be exclusive manufacturing or selling rights  May be rights for specific geographical areas, eg Asia

Conclusion

Benefits of strategic alliance

Benefits of licensing

1. Financial payments

1. Upside financial payments 2. Increased financial resources  Cash  Transfer assets  Equity  Loans 3. Skills Transfer  Technical  Management 4. IP Acquisition  Platforms  Research Tools 5. IP Creation  In field of collaboration  Outside field of collaboration 6. Co-marketing  Manufacturing  Selling