As pharmaceutical and mid-sized biotech companies increasingly seek to enhance their pipelines through externalized relationships, the option deal—typically with a smaller bio-tech—has become an increasingly popular contract structure. This structure allows for greater risk sharing and less complexity between pharma and biotechs. Instead of licensing the com pounds and taking on the drug development risks themselves, pharmas fund biotech development and largely leave the biotechs alone to manage the early development.
For companies that formally or informally tier or stratify their portfolio, option deals are usually seen as mid- or lower tiered deals due to the relatively low levels of interdependence between the organizations pre-option. Typically, this means that alliances resulting from option deals do not receive the same degree of alliance management that a more complex alliance would, e.g., the support of a full time Alliance Manager or a full alliance relationship launch. Yet, companies who are entering into option deals would be well served by thinking carefully about applying some select aspects of “top tier” alliance management.
Option-Deal Alliances: More Complex Than You Think
At first glance, the option alliance relationship seems straight forward: a pharma funds all or most of the research and development phase dependent on achievement of interim development milestones by a small biotech. In exchange, the large company obtains the option to acquire the assets, or a license to the assets, on the occurrence of a triggering event such as completion of a phase 2 clinical trial. If the option is exercised, it can result in an alliance in which a broad set of development and commercial activities must be jointly managed between partners. This type of alliance looks and feels more like a classic in-licensed alliance between large and small organizations.
But what about the alliance that exists pre-option? What level of alliance management needs to exist in a relationship where one party is simply doing the work and the other is paying the bills? There are several aspects of these early-stage option alliances that create the need for well-thought-out alliance management structures and activities.
- First, there is the possibility that the partners may disagree on whether milestones were met or not. Conflict about the sufficiency and meaning of results are likely given the different perspectives each partner will have based on risk and other interests.
- Second, there are often early decision-making rights that are contractually allocated to the large pharma or at least jointly allocated to the parties. These decisions are usually about target selection of the asset — the large pharma wants a voice to steer early development towards candidates that they are most interested in and see as most commercially promising. These are complex decisions where neither party has full information and the stakes feel high for both organizations.
- Third, given biotechs’ focus on the science, they may expect or need some commercial or regulatory support — limited as it may be — in the early stages. Likewise, the large pharma may want to provide this kind of expertise and support to optimize chances of success. The process for providing and using this input needs to be planned out.
- Finally, given the duration of many option deals, a big pharma’s strategy can change in a way that deprioritizes its interest in the option. The big pharma can pass on the option or decide to terminate the agreement before the option period has been triggered. Either of these circumstances may have far reaching consequences for the biotech who may be left without adequate funding to complete development and bring the drug to market. And, unless handled well, the large pharma’s reputation as a partner could suffer in the marketplace.
As a result, option alliances are well served by setting clear expectations for communication of development progress, agreeing on consultation and decision-making processes, and creating a mechanism or forum for ensuring that the partners remain in strategic alignment.
Setting up Option Alliances for Success
Given the unique (and often overlooked) complexity and inter dependence of option alliances, there are several ways these alliances can focus alliance management activities to partners’ mutual advantage. Although option alliances do not require the full panoply of activities that traditional co-development alliances require, there are several alliance management activities that are critical for optimizing the value of the agreement to both sides.
- Clarity in decision-making roles and a well-facilitated decision-making process: Option deals typically define a set of decision points that require agreement on when milestones have been met and when the option is triggered. These can be “do or die” decisions for a biotech and can quickly devolve into conflict where partners do not view results with the same eye. Likewise, early target selection will inevitably involve multiple decision-making criteria that include, but are not limited to, the research outputs. Whether these decisions are joint or unilaterally owned by large pharma, they require understanding a broad set of data that neither partner has sole access to. Given the implications of these sorts of decisions (and the possibility for conflict), a well-structured decision making process—facilitated with a focus on sharing interests and understanding each other’s perspectives—is critical.
- An alliance launch process: Like most alliances, option alliances require some form of a joint one- to two-day meeting in which, at a minimum, technical information, development plans, an overview of key contract terms, and each organizations’ vision for the alliance are shared. The alliance launch is also the right time to discuss and clarify expectations around communication and decision-making.
- Appropriate connectivity through well planned governance: Although option alliances require much less early joint work, to the extent that there is joint activity, they tend to suffer from the challenges of “David and Goliath” relationships in which the smaller organization can get easily over-whelmed by the governance demands of a large pharma structure. While this challenge is mitigated by the limited nature of the joint work, it behooves both companies to think carefully about how to formally connect stakeholders and to precisely allocate decision making responsibilities between the JSC and the joint (or biotech) teams below it. This is especially important for smaller biotechs whose JSC members also sit on the teams that are doing the work.
- A strong executive sponsor and senior relationships: Given the desire to maintain strategic alignment through the life of the alliance and the serious nature of conflicts that occur, option alliances benefit from genuine, well-maintained executive-level relationships between the lead of the biotech and someone sufficiently senior within the large pharma. Small biotechs tend to expect this. A strong executive-level relationship is key to efficiently managing or de-escalating conflict.
- An alliance manager to drive all of the above: A lesson from traditional licensing deals that applies here is that achieving the objectives listed above requires a strong, skilled alliance manager in the large pharma paired with a (formal or informal) counterpart in the biotech. These individuals need not operate in fully dedicated roles, but each partner should have an individual who is accountable for making the above-described facets of the relationship function as effectively as possible.
Option deals are attractive because they present large companies with a lower risk and easier-to-manage opportunity to build a pipeline than traditional licensing deals. Due to the clear divisions of responsibility and the definitive handoff point, it is easy to assume that little alliance management is needed early on for these option agreements. However, in order for an option holder to achieve the intended value of the deal, it must tend to the relationship in perhaps unexpected ways. Option alliances have the best chance of success when the organizations apply some key alliance management approaches to the partnership.