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In a recap of our December presentation, which includes video and an accompanying transcript, a cross-practice panel examines significant developments, trends and hot topics in the pharmaceutical, biotechnology and medical devices industries that covers governance, licensing, intellectual property, FDA regulatory and clinical research.
Topics addressed include:
- The Clovis decision and its impact on board oversight and corporate governance
- The increasing trend of profit splits in collaborations
- What life sciences companies need to know about patent law trends
- Legal and regulatory landscape related to real-world evidence and “big data”
- China and foreign influence in U.S. research
Marc Rubenstein: Welcome to the December edition of Ropes & Gray’s Life Sciences Quarterly. My name is Marc Rubenstein and I'm a partner in the life sciences practice at Ropes & Gray. Good to see you all this morning. So for those of you who have come to this in the past, thank you. But also be aware we're going to do something a little different today. We usually do deep dive on a single topic. Today we're going to cover five different topics – sort of a round up of hot topics of the year. We've never done this before so we'll see if we can logistically handle the transition, but bear with us. We'll be taking questions for each session. So, don't hold your questions from a particular session until the end just because we won't be up there at that point. So feel free to ask questions at the end of each session. Our presenters today are Zach Blume and Marty Crisp – they will be in this order – myself and my partner Mark Bellomy, second, Melissa Rones after that, Kellie Combs, and then we'll finish the morning with Mark Barnes and Val Bonham. And with that I will turn it over to Zach and Marty.
Zach Blume: Morning, everyone. Thanks very much for coming. I am Zach Blume. I'm a partner in our strategic transactions group in Boston and represent primarily life science companies in M&A and capital markets transactions.
Martin Crisp: Hi, good morning. Thanks for coming out. I’m Marty Crisp. I'm out of the New York office. I'm in the litigation and enforcement practice group. I do all sorts of matters, but mostly specialize in stock holder litigation, oftentimes in the life sciences sector. As we'll go through today, my practice includes a lot of traditional stock drop litigation that I'm sure you're all familiar with but it often includes a lot of state law fiduciary duty litigation where stock holders will sue directors and officers of corporations alleging that they've engaged in some kind of misconduct that's harmed the company. So just to kick us off a little bit I appreciate that no one's usually thrilled to see a litigator, particularly in the morning, usually means something's gone awry. But Zach and I have been talking along with some of our life sciences colleagues, and we've talked about some ways to provide some preventative medicine discussions to our corporate clients to avoid some of those down the line outcomes that no one really wants: the depositions, the invasive email discovery, all of that expensive trauma that folks have to endure years after something's gone a little bit sideways. So that leads me to a particular litigation trend that we've seen grow exponentially over the last couple of years and which we think has gotten a real shot in the arm from some recent cases coming out of the Delaware Supreme Court. So just to go some basics, I know this is a bit of an advanced audience so you're all probably familiar with this. We won't spend a lot of time on the basics. But directors and officers of corporations have fiduciary duties. Your duty of loyalty, your duty of care, the relevant law that's going to govern most of this is Delaware either because the corporation is actually incorporated in Delaware or because you have a state corporate law that is drawing by-proxy from Delaware because they don't have a well-developed body of law on their own. So when we see trends arise the incubator is often what we see in the Delaware Court of Chancery down in Wilmington. So when I was coming up, derivative lawsuits were few and far between. And it was a pretty sleepy area of practice. So derivative cases are technically corporate assets, but they're lawsuits that are brought in the company's right by individual stockholders claiming that current or former directors or officers of the company have acted in such a way as to harm the corporation and ultimately the additional stockholders. Again, it was pretty sleepy for a long time. It is no longer sleepy. We see a lot of these cases. And without boring you with the Delaware inside baseball, the ultimate reason why is that the plaintiffs' bar is economically rational. There's the famous quote from Willie Sutton, "Rob banks because that's where the money is." The plaintiff's bar will go where the money is. And the money right now from my perspective, aside from stock drop cases, is in these derivative lawsuits. And the reason why it's in these derivative lawsuits is because you have judges who are keenly focused on alleged conflicts and controller transactions and potential sort of dereliction of duty claims against corporate directors and also because you have D&O insurance policies which will pay out for these claims. And again, these are all things that are very well-known to a group of very, frankly, sophisticated commercially-rational actors. So that's really why folks have been voting with their feet and driven the claims towards there. So your typical fiduciary duty claims, again, duty to loyalty, that's really the focus for most of these claims. That usually involves some kind of allegation of a conflict of interest. And the reason why folks are focused on that is because claims for the duty of care are exculpated through most corporate charters under a section 102B7 provision. So there are no monetary damages available for that type of claim. So you really want to focus on your loyalty claims which plaintiffs can theoretically drive towards some kind of money damages award.
Zach Blume: It is fundamental and for all of you who have been at companies who have suffered a stock drop or have been through litigation in connection with a merger or other typical litigation of that sort that all of you are probably familiar with at least from some vantage, this really is a business. And I think that Marty would say it just as much as I would that the plaintiffs bar that represents people and seek out plaintiffs, if you see their press releases and otherwise, this is their business. And so they are going to find it's a bit of a herd and they follow where the money goes. And so we'll talk about current trend obviously here. But this is not always based solely on legal principles but rather where the dollars are.
Martin Crisp: Shocking. There's also no Santa Claus, I'm very sorry to say. So to fast-forward to the trend that I think we're here to talk about briefly today is the rise in what I call Caremark claims. Caremark claims are a unique spin on the typical breach of fiduciary duty claims, the core allegation there is that directors or officers breach their duty of loyalty because they fail to make a good-faith effort to oversee the company's operations. The way I sort of colloquially describe these is the dereliction of duty claim. Unlike most breach of fiduciary duty claims, these claims do not require any conflict of interest allegations. No one has to have been alleged to have an insider relationship or to have somehow been paid or otherwise benefited economically from whatever it is that the plaintiff is challenging. So Caremark imposes two burdens on directors of corporations: 1) that the board has to have a reasonable board-level system of monitoring and reporting; and 2) that the board has to adequately monitor that system of oversight. And what that second prong really means is directors have to be on the lookout for red flags of misconduct. That's the magic phrase in this world. So for years the Caremark claims, again, it was a pretty sleepy area of the law. They tended to get brought in extreme cases or by, frankly, the bottom feeders of the plaintiff's bar. If I saw a Caremark claim come in I wouldn't really be fussed and that's the type of counsel we'd be giving our clients. The magic quote here is it was “the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” And the reason for that is Caremark requires plaintiffs to plead and prove that the directors acted with scienter – they affirmatively willfully abandoned their duties as directors. And what well-advised board is ever going to really do that? And it's very difficult to prove that. However. that's on the rise a little bit which is contrary to what we've seen historically. So, again, as I talked about earlier, these are derivative claims brought in the right of the company. And without getting into all of the whys and wherefores the magic test for these plaintiffs is to try to show that a majority of the board abandoned their duties willfully and therefore they, the individual stockholder, should be vested with the right to pursue the claim, not the company itself. That they're the ones who are the true stewards of the company, not these directors who have essentially fallen asleep at the job and that they've done so willfully. The big benefit, and Zach sees these a lot, and I certainly do is that for derivative claims stockholders, particularly of Delaware corporations, and this is also now true in Massachusetts, can get what are called Section 220 books and records documents. And sadly, Josh over here, we've lived through this, over the course of the summer. And what that means is that there is a statute under most state's corporation law that allows stockholders to request corporate books and records. And the standard for obtaining those documents is incredibly low. It's, again, a very, very low standard. It's very easy to satisfy. And what that allows stockholders' lawyers to do is to get things like board meeting minutes, presentations to the board, presentations to relevant committees. Sometimes they get at emails and text messages if they're at the director level. And then they take all of that, they put their own unique spin and perspective on what those communications and documents mean and they draft a complaint and they file it. And they say, "Look at horribly these directors have behaved." So as opposed to someone coming in cold where they're just relying on the public pleadings, these folks really have a running start when they get into court.
Zach Blume: Yes, and this has been something that we've seen also in merger litigation, for instance, whereas previously you would oftentimes get a strike suit that would be filed very promptly after you would file your proxy or your tender offer documents. Now you may get a 220 demand where they're not only going to be, you know, trying to look at whatever disclosure you're putting out there. But they're also getting your books and records if they potentially have another post-closing demand. And so this has really become something that we're seeing people use pretty much in all of these strike suits as part their tool kit.
Martin Crisp: Yes, that's exactly right. And the Delaware courts have told them to do this. And when people have failed to do it they've scolded the plaintiff's bar. So it's almost a pre-req now for anyone that's trying to take these cases and pursue them seriously. So there are two cases that I think have been a real boon for the plaintiff's bar and were the genesis, in some ways, for this discussion. One is a case out of the Delaware Supreme Court called Marchand, which everyone just thinks of as Blue Bell because it's about the ice cream brand down in Texas that everyone is cultishly loyal too. And essentially what happened, as some of you may know, is there was a listeria outbreak with their products back in 2015. It was deadly. Some people died. Many people were very sickened. And it also was very economically harmful for the company because it precipitated a liquidity crisis. So unsurprisingly people sued. When bad things happen, plaintiff's lawyers sue. It's the axiomatic rule of the world. So folks sued. And they sued on a Caremark claim. Essentially alleging based on some 220 documents they had gleaned that the directors of Blue Bell had deliberately fallen asleep at the switch. And they went to the trial court. The trial court did what trial courts typically used to do with these claims and knocked it out of court and said that it wasn't well-pleaded. Case went up on appeal to the Delaware Supreme Court – Delaware Supreme Court reversed. It's a big day at least for those of us who practice a lot in Delaware to see the Delaware Supreme Court say, "No, no, no. This claim should go forward." And what the court really ultimately said is a quote that I think is important: “Caremark has a bottom-line requirement that the board make a good faith effort to put in place a reasonable board-level system of monitoring and reporting.” And in Blue Bell they said the board didn't do that. And the facts in Blue Bell are a little extreme. So that's the caveat to all of this. It's a monoline company. Right? They make ice cream. But there were no board-level reporting requirements on food safety. There was no regular procedure in place for the board to get updates about food safety issues. So they were totally flying blind with the type of risk that ultimately manifested in the outbreak and the court caught them for it. And they got scolded accordingly. So one other thing I think to talk about and maybe Zach has some thoughts too. But the court was really focused on whether the board was receiving reports from management on whether there were food safety issues at this company. And that has a little bit of an interesting ramification for the advice that we all give to our sort of C-suite and board-level clients on these sort of issues.
Zach Blume: Yes, and so for board meetings though when you were setting them up obviously on the agenda you typically would have key items that you know are fundamental to your business. And you would anticipate that an ice cream company, food safety is going to be among those. It may not be, in a given quarter, that critical. But you would expect some sort of report from either CEO who may be doing it or there might be somebody that's responsible for compliance. Or there might just be somebody that otherwise monitors facilities and the manufacturing here of the ice cream. That was clearly just not happening. So you would expect that just in the ordinary courts we might be able to address this, but it is something that you need to be thoughtful about. We'll talk a little bit more about that down the road. But one thing that I guess is an open question a little bit is how can a board who is actively having meetings and relying a little bit on management to report up, if they just never hear these details, it's hard to blame a board who is just in the dark and not necessarily at their for their own fault. I mean, if the CEO doesn't tell them something when he's asked and he is actively keeping it to himself it's hard to blame a board. But nevertheless, the plaintiffs will allege that the board was in the dark on this and at their own fault.
Martin Crisp: Yes, I think that's exactly right. I think ultimately some of the practical takeaway guidance that we can offer here is, look, if you set up reasonable reporting policies on your key risk areas and for some reason there's a risk that was perceived to be minor and somehow manifested in a bit of an outsized way or for some reason for a particular reporting period something just falls down a little bit and doesn't get passed up the food chain to the board. It strikes me as fundamentally unlikely that a court's going to hold the board liable for not having magically discerned that because what the board is really tasked with doing is designing the policies and procedures to set up a situation where they're going to get that information. And if systems sometimes fail and that kind of is what it is. But it's really incumbent on the board to set up a set of procedures to be able to get that information on a regular basis.
Zach Blume: Yes, and when we say also just one caveat to that, when we say that it's going to be hard for a court to actually affirmatively decide in favor of the plaintiffs here or that a jury would, we have to remember that the key element or key timing that we're actually looking at primarily is the motion to dismiss stage. If they adequate plead here that the board wasn't getting this information they may get past that motion to dismiss. And that's when it gets very expensive, very distracting and everything else for the company. So it doesn't necessarily mean that we're worried about whether the court ultimately years from now would actually decide in the plaintiff's favor. But it is more critical that we know with this motion to dismiss and whether we have facts that we can bat it away early on.
Martin Crisp: Yes, that's exactly right. So the other key case, which is somewhat more recent than Blue Bell is the Clovis Oncology case, which is the other type of potential Caremark issue which is, yes, you had policies and procedures in place, but did you follow them or did you sort of willfully blind yourself to data that was coming up to you on important issues? Again, I think it's important to note that this is, if not a monoline company, then a company that was particularly dependent on a particular pipeline product. So the court, again, was focused on the fact that this was so core to the company's operations, this issue, that the board was discussing the court was also particularly focused that the risk that was being breached here is a legal compliance risk, not just a business you should've gone path A with customer X instead of path B. So, there again, as Zach said, the key decision was at the motion to dismiss stage and the court denied the motion, allowing the case to proceed into the expensive document and deposition discovery. And ultimately concluding that the directors had ignored red flags and misconduct. And in doing that they relied on the fact that the board had received all of these presentations about the sort of industry standard, at least in the court's view of the world, ways to run this clinical trial but had affirmatively decided to ignore all that and publicly report data that was based on sort of information outside of the scope and mandate of the trial.
Zach Blume: And one of the challenges, of course that you all appreciate, is that what is a red flag. Of course you're looking at this in hindsight and of course if you put the facts together in the right way, in hindsight this looks like of course if you had looked at these documents you would have recognized this is a fundamental problem for us. But it's not always going to be that obvious. There are going to be just a number of facts that the board is going to hear in the ordinary course of their meetings and everything else. And it may not in their minds and reasonably so add up to a red flag that is just this is going to bring down the company or this is a fundamental problem for us. So it's just not something we can necessarily prevent in advance but we certainly need to be thinking through what are the key risks here and really analyzing the information thinking ahead to what it would look like in hindsight if you were challenged.
Martin Crisp: That's right. And I think we can fast-forward to the last slide. But to spoil it a little bit, as Zach said earlier, these folks have a herd mentality. So as you would expect, after Blue Bell and Clovis there's a million of these lawsuits now. Everyone's trying to file them. There's some sort of particularly prominent cases going on right now. There's one against Boeing about the 737 issues that they have that manifested in some crashes. There's one against a variety of life sciences and distribution companies out of the opioid crisis. And none of these cases have been successfully dismissed. So this is now the theory of case du jour that we're really dealing with on the day to day. And I expect we'll see many more of them as everyone sort of piles into the door to try to get their recovery before the pendulum invariably swings back a little bit more towards the defense side on these claims.
Zach Blume: Yes, and this is not to suggest necessarily that they're also doing the typical drop suit for these companies that are suffering these. They will do that in addition to this new type of litigation and hope to just double dip effectively on the same set of facts and hopefully just attack from two different angles.
Martin Crisp: Oh yes, that's exactly right. You'll have a plaintiff's lawyer tries to be the lead in a stock drop case, doesn't get it. Turns around, files the derivative case. It's just another way to put your sort of – to be coarse about it – to sort of put your snout in the trough.
Zach Blume: So just getting tethered to the bottom line for preventative measures that you should be thinking through and advising your board about. So again, there are two prongs really to these Caremark claims. And they're really – you need to both implement reporting measures and then you also need to follow through on them. If you're getting the information you need to actually actively look at it and think it through. So just a handful of best practices which most of you, I'm sure, are active on and implementing. But it's the critical thing at the very beginning is just to think through what are the key risks for the business. And for many companies that are probably represented here that might be pretty straight forward. You're in the clinic, really the clinical trial results are probably the fundamental aspect of it now. As companies grow, you not only have continued development but you have commercialization risk, you have financial issues that may be relevant. You may be expanding overseas where you're going to have regulatory risks overseas. So there may be many more. Once you identify those you need to ensure that the company has policies to address them. And, of course, again, many people put policies into place with the best of intentions when they do that. These need to be evolving, however. It's going to be one thing if you put a policy in place today. But the company's going to be very different two years down the road. And you need to continually think about whether what you have in place is appropriate for the business as it is now, not what it was two years ago because again, if a plaintiff challenges it, just because you had a policy reporting on the clinical trials to the company, once you've commercialized, that doesn't matter anymore to the plaintiffs. They also have to have obviously a reporting mechanism. Management should be encouraged to present information to them. But also, they need to be thoughtful about it. You need to engage the right advisors, the right consultants, the right experts on these areas to really talk about it. Obviously, directors typically are fairly sophisticated people. But they are still going to have specific skills person that is a former CPA and a great auditor may not be the best person to be looking at your regulatory policies. And you just need to also continue to build a record. For the people that are maintaining the minutes, that are setting up the board meetings, that are setting the agendas you need to make sure that all of this presents a story that you can then present if you were ever challenged, "Look, we had all of the policies in place. We actually talked about. We actually got information and considered it." It's not enough, again, just to have it somewhere that the directors never have access to and never actually engage on and think through. But you actually actively need to do this. And one final reminder on here is just to make sure that the D&O policy is going to adequately protect directors. It's something that you should be looking at every year. Obviously your brokers will probably be advising on it and encouraging to get more insurance at all times. But it is something to be thoughtful about. And it may be worth talking to your advisors about separately too just to see what new claims have come up and what you may need to be thinking through.
Martin Crisp: Yes and let me just hang a foot out on that D&O policy point, one thing we've seen a lot in the D&O market is people agreeing to higher coverage limits and more robust coverage language. But then tagging you with a really high retention so that you're never going to get there. So yes, you ostensibly have coverage but it's never realized because it only trips in after five million or something like that. So one thing we've been talking to folks about is really advising them to push hard on that retention issue so that the coverage isn't just theoretical.
Zach Blume: Great. So any questions or any… Steve?
Audience: So I assume the Caremark standard is under the duty of care, not the duty of loyalty, right?
Martin Crisp: It is actually a duty of loyalty line of cases where it is essentially saying that you, the directors, have acted so aggressively negligently that we have no choice but to assume that you acted in bad faith.
Audience: Interesting. And so that's because you had said earlier that there were more duty of loyalty cases than there were in the past, which I always felt duty of loyalty meant some sort of self-interest. But it's not just self-interest – it's gross and reckless behavior that advises the level of some duty…
Zach Blume: It's bad faith. Right? You are actively ignoring your duties. And you are actively acting adverse to your shareholders and to the company.
Martin Crisp: Yes, you're right that typically duty of loyalty claims are in the conflict of interest sort of hypothetical. But this is sort of an interesting varietal of that type of claim.
Audience: So that's not covered by the exculpation for the majority?
Martin Crisp: Correct. That's right.
Audience: I'm just curious to follow up on something you said a little while ago – you were talking about if board members aren’t informed they don’t have the information that’s right to really worry them or whatever. I guess I'm just curious, what is the duty of the board member to proactively inquire about it?
Zach Blume: Well, obviously I think the first prong that we talk about obviously is you need to set up this reporting and monitoring mechanism. You need to have policies in place that require management to push the information up to the board and to have the board receive that information. And the board should actively be saying, "Is this all of the…"simple questions – "Is this all the information? Do you have any concerns here? Do you have any thoughts here?" You may ask specific questions to management that is attending those meetings. But again, if all of those are in place and are actually satisfactory policies but management just doesn't tell them and you don't have a record of them telling them it's very hard to blame a director who's actively trying to do that. But again, in hindsight, it'll just look like they probably had access to it and you didn't do it. So it's tricky.
Martin Crisp: It is. I mean, I think Zach is exactly right. That if you have an adequately set up process and procedure situation I don't really view there as being an independent duty for some director to conduct an independent investigation to see if they're being misled or not being told all the information. But rather asking the sort of straight-forward questions Zach just mentioned I think would be adequate in that scenario.
Audience: So all these things are helpful in getting rid of sort of on the ultimate merits, but what can you do to be successful at the motion to dismiss?
Martin Crisp: Build your record. Period. Full stop. And let me tell you what I mean by that. So we talked about the 220 demand where plaintiffs are allowed to incorporate board-level documents into their complaint. What we now insist on in the NDA that gives plaintiff's lawyers those documents, it's what's called an incorporation provision, which says if you use a document, I get to use it too. And I can quote from that last part of the sentence you left out. So if you've got the aggressively-built record that Zach was talking about earlier you can say, "No, no, no if you look at the paragraph right below the one cited at paragraph 74 in the complaint you'll see that the directors were, in fact, updated about the regulatory risk concerning this particular potential product." And you put that in front of the judge. And you essentially force the judge to have to conclude that the directors face potential liability because they were somehow misled by the directors or something like that. So if you have the adequate policies and procedures and you've got an affirmative record of these folks fulfilling your duties even at a motion to dismiss stage, which arms you with a lot of the tools you need to try to knock that suit out.
Zach Blume: It is tricky though too, just in the ordinary course of board meetings it is not infrequent that we see that are very high-level. In fact, we encourage you to be relatively high-level in preparing your minutes. However, to the extent that you recognized that there are these key fundamental problems or potential problems it is probably advisable to start building out those sections a little bit more just to show what you've been talking about. And obviously to the extent there are materials that are shared at the board you want to make sure that those are included, they're put into your books and records and they're exhibit A to our minutes you'll see that we had this presentation from the compliance officer that highlights it. Those are the kinds of things that you would probably want to be looking at.
Marc Rubenstein: So as stated earlier, I'm Marc Rubenstein, I'm a partner in our life sciences practice and with me, is Mark Bellomy.
Mark Bellomy: I'm Mark Bellomy. I'm a partner in the strategic transactions group in the IP transactional subgroup and focus primarily on life sciences collaborations.
Marc Rubenstein: So we're going to do something different than Zach and Marty did. We're actually not going to have slides. We're just going to talk through the pros and cons. Trends. Right. Of profit. So we're going to do three basic things. We're going to first talk about why we think there is an increasing trend in profit split so we're not going to dwell on that. We're going to actually give away the answers and tell you what we think the pros and cons are. And then we're going to drill down into some of the terms in structuring of profit splits that will sort of elucidate and demonstrate how these pros and cons work in practice. So certainly we believe that profit splits are becoming more common. They used to be actually quite rare for reasons that we'll talk at in the pros and cons. But we are seeing them in, I didn't do this scientifically, but certainly in half the deals we do, I'll say, now include some aspect of a profit split. And why is that? I think the main reason that we're seeing more profit splits is that both boards and markets and investors recognize that doing a collaboration for your lead asset is not non-diluted financing even if you get $100 million upfront. That always used to be viewed as non-diluted financing. You're not issuing any new shares, the stockholders still own the same amount of the company. But everybody now recognizes that they own a company that has encumbered potentially its lead asset. And that actually is dilutive to the value of the holdings of the shareholders. So the market used to consider just a validating pharma deal as a value creating event for the company. And now I think everybody's a little more sophisticated in trying to discern was value created by that deal or was value dissipated in doing that deal? And so a way to buttress that issue, I was going to say that perception, but it really is an issue that partnering an asset obviously does give away some value in that asset. Otherwise the pharma partner wouldn't do the deal. So to buttress that issue biotech companies are frequently looking at profit splits and other ways of retaining value in the partnered asset. And that's become a big part if you read, you know, prospectuses of companies going public and they've retained value in an asset that they've partnered that's something that they'll highlight and point out in their prospectus. The investors want to know that there is retained value in the asset that's been partnered. So that's why we think that profit splits are becoming more prevalent. I think they're here to stay. They used to be viewed as challenging to administer which is I guess one of the cons. We'll get to that. But, profit splits are certainly part of the regular menu now of deal terms. So that's why they're here. Is it good or bad? Well, Mark, is it good or bad?
Mark Bellomy: Is it good or bad? Well, I'll just start off by saying it's difficult to cover even a top level of this in 20 minutes but we'll do our best. Also I'm personally still coping with Marty's revelation that Santa doesn't exist. So I may be a little bit off my game. But the pros and cons, there are a lot of reasons why these can be good. And the reasons why they're challenging or the cons are primarily focused around complexity. Pros, these types of transactions really reflect the beauty of commercial contracting and particularly collaborations where you can, subject to regulatory law and a few other restrictions you could structure these any way you want which allows the parties to leverage the relative strengths, the relative assets, the relative focuses of the two collaborators. You bring the best of the partners together to create an even better whole. Other pros that inure to the benefit of both parties. You can more precisely allocate risk and reward rather than guessing at it with a royalty structure. De-risk is the wrong word. Unburden's the wrong word. But you can basically share risk and reward in a way that allows both parties to take multiple shots on goal. The party doesn't have to bet 100% of their resources on a single program or 100% on the case of large pharma, of its budget in the space on one program. They can take two shots instead of one if they're splitting 50/50. So those are kind of the top-level pros. And then when you look at the, we're assuming for purposes of this that it's a typical structure which is kind of the pioneer, the licensors is a relatively small biotech and licensee is a bigger pharma. From the pioneer licensor perspective, small biotech perspective, as Marc was saying, you can demonstrate value-creation by them being will retain at least partial control over their crown jewel. You can also leverage the experience to grow into a big pharma or grow into a bigger company. You can build your manufacturing capabilities, you can build your commercial internal infrastructure. And from the licensor or big pharma perspective, primarily this is a differentiator. There's a lot of competition for the really good programs and the really good new therapies. And I personally think, I totally agree with Marc, and to say it a different way, I think the market just demands it. If you have three or four interests of large pharma in a particular program, three are offering a royalty structure, and one is offering a profit split and more control. Unless the numbers are way off, you probably know who the winner is. Some from big pharma would call it an accommodation, but I really think it's just lining up with where the industry's going. Anyway, cons again, like I said just a second ago, really tie around complexity. And that's why people kind of shied away from these for some time. But they've been on the increase. I saw articles going back to 2005 saying how this was a trend. So, it's certainly on the rise, but it's been around for a long time. Complexity plays out a number of ways. First of all, you've got new and innovative structures. You can't go back to your standard licensing templates. And you're really structuring things from scratch. And you're allocating risks, rewards, responsibilities from scratch. As a result, drafting negotiation time, costs, the normal friction of the negotiation process increases. You have increased operational and collaboration management costs, and you have to dedicate resources to those. It also really increases the importance up front of diligencing and knowing your partner, and making sure that you're entering into this relationship with a partner that you trust, has a solid reputation, you know is going to perform from both ways. And so, with those pros and cons, and there are many others. I tried to keep it short, but Marc knows I cannot keep anything short. It creates a new range of issues, and we'll kind of go through those now. First of those is what is the split, and what are the mechanics of the split? So Marc, what is that?
Marc Rubenstein: Right. So now we're going to drill down into some of the structural aspects that I think will make even more clear what some of these pros and cons are. And, by the way, hopefully more people in this room have been involved in structuring deals than getting sued in derivative class action. So if people here have experience that either is consistent with what we're saying or different than what we're seeing, we'd love to hear it. So please feel free to speak up as we're talking. You don't need to wait till the end. So for the purpose of our conversation, we're going to assume what we think is a fairly typical structure where a biotech is licensing to a firm a worldwide rights, but the profit split is not worldwide. We'll assume that it's the U.S. That's relatively common. And the rest of the world is a royalty structure. So we're going to discuss four different aspects of profit splits in the context of this sort of structure. What are the mechanics and economics of the profit split? What's the interplay of shared economics and shared activities under a profit split? Governance issues and opt-in and opt-out mechanisms. So those are sort of the four biggies, but it's certainly not a complete list. On the mechanics and the economics of the profit split, so the first thing that obviously needs to be figured out, and this happens long before the lawyers get involved, is what's actually the split? Is it 50/50? Is it 60/40? Is it something else? Does it vary over time? And obviously the crux here is understanding that you don't get anything for free in this world. That the biotech needs to figure out what resources it has and what it will have in the future, or it anticipates having in the future, so that it can support paying the costs. The 40%, 50% of the cost for development and early commercialization launch before the product is profitable, so that it can support its end of the bargain in the profit split. In this regard, that ability to pay is sometimes mitigated by structuring in milestones that we would typically see in a royalty deal. Either milestones that arise outside of the profit-split territory. You get a regulatory approval in the EU, and the pharma pays you a milestone. Or in addition, you would often or at least frequently see milestones, even in the profit-split territory. Even though you are splitting the profits and the costs in that territory, frequently there are value-creating or risked-mitigating milestones such as clinical trial milestones or approval milestones in the U.S. Obviously, from the biotech's perspective, these are important to get, as far as cash flow. And can either partially or fully cover the anticipated biotech share of the costs of the development. But outside of that, the biotech has to be prepared to either finance or through other deals find a way to support its part of the cost split. So the next thing that gets heavily negotiated in these deals, and the verbiage goes way up on these deals, the length of the contract, as Mark described the complexity, is what's in and what's out. Just the economics of the profit split. One of the main reasons that royalties were considered preferable to profit splits is because it's easier to measure the top-line number. You'll hassle over net sales deductions, but that doesn't end up to be a lot of the gross sales in the end. But it's easier to measure, and there's less opportunity for gaming the top-line number, than the bottom-line number, the actual profit that's getting split. And how are costs getting allocated, and is something getting improperly allocated? What is fully burdened and more pressure and what a fully-burdened cost is in this context? So there will be long definitions typically, and there should be, for what constitutes a development cost, what constitutes a manufacturing cost or commercialization cost. How are our internal costs determined? How are external costs measured, if the cost benefits other aspects of the business, if you're buying a piece of machinery that may be used both for this program and other programs? How is the cost allocated? How is the depreciation allocated? This is where the financial people and the biotech and the pharmaceutical company roll up their sleeves, grin, and really get to work. Because these are heavily negotiated finance terms.
Mark Bellomy: I was just going to say, I don't see them grinning a whole lot. Sorry.
Marc Rubenstein: I know, though, it's a lot of sleeve rolling.
Mark Bellomy: Fair amount of grimacing.
Marc Rubenstein: There's such a fine line between grinning and grimacing.
Marc Bellomy: True enough, sorry.
Marc Rubenstein: There's also other costs that need to be considered, whether they're in or out of the profit split. Future in-licensing costs. How are those in? Do both parties get to decide whether the costs of a future in-license that you need, or is useful to exploit the product is in, if there's a big up-front payment, and the in-license technology again may benefit both. Let's assume the biotech is in licensing technology, and it'll be used for the product, that's the subject of the deal. But it may also be used in the biotech's other products. How is that allocated? What portion of that's in cost for the profit split? Third-party litigation is certainly just a cost of having a pharmaceutical program. Is that in, is that out? Is it in, if nobody's at fault, product liability claim where nobody's at fault? Is it in an all cases, if it's a multijurisdictional litigation? And as we're assuming, the profit split's only in one jurisdiction and not in the royalty jurisdiction. How do you allocate those costs? It’s complex, and in the end I think often without anybody's fault, ambiguous issues that often need to sort of be renegotiated and resolved at the time. So all these other costs basically of having a business, the pharma program as a business, need to be determined. Cross-territorial development activities need to be addressed. If you're doing a clinical trial that is being required by the FDA and not the EMA, it's pretty clear that's a U.S. development cost. It's pretty clear that's in the profit split. If it's a 50/50 profit split, the parties will split that evenly. But if you're doing a trial that will benefit filings both inside and outside of the profit split territory, how is that handled? It's just a matter of negotiation. A simple way of thinking about it is if you assume that the U.S. is 50% of the world market for your particular drug. It may or may not be, but if you agree on that for instance, and it's a 50/50 profit split, then 50% of the 50% is 25%. So if it's a cross-jurisdictional developmental cost, that's 25/75. But there's a lot of gray in between those two spaces. And that all needs to be hammered out up front. Overruns. Since both parties are now writing checks to cover the costs, presumably there'll be a development plan with a budget associated with it. If it goes over budget, which things rarely come in under budget, as we all know. So not if but when it goes over budget, who's bearing that cost? Often one would see a buffer that the parties will split the amount in the budget, plus a 10% buffer. Because we all know that's the way the world works. Above that, either the party incurring the cost has to carry the burden for those costs, or maybe there's an appeal mechanism in the document, so that if the costs were overrun outside of the control of that party, the parties will agree to split it anyway. Again, all the subject of negotiation. So without getting any deeper on this topic, that's to give you all an overview of sort of the complexities of figuring out the mechanics and the economics of the profit split. We'll now go back to Mark, the other Mark, to talk about shared economics and shared activities, and the intersection of those two things.
Mark Bellomy: Yes, so what I'm going to talk about here ties in with a lot of the ideas and the allocations that Marc was talking about. I was trying to think of a simple way to kind of summarize this, and rationality and balance were my themes. And I'll try to communicate those. But in practice, those don't always prevail. So on the short activities side, like I was saying, the beauty of these types of contracts, you can structure them however you want. That's also the curse of these types of contracts, because you start from scratch, and you're looking at two coy different partners coming from completely different philosophies. They share common interests, but you have to start from scratch to determine who's going to do what. If it's a true partnership, it's a 50/50 split. Parties are interested in cost. Parties are interested in what it costs the other party to perform. So one of the first things you start looking about is, who's going to do what? And in a completely objective world, which I wish we lived in but will never exist, you would literally be able to objectively go through and say, okay, sorry I'm being a little bit stereotypical. But, you know, smaller biotech, you're nimble. Your R&D, you guys can think and operate, react quickly in that space. Big pharma, you run a bazillion clinical trials. You do that well, so you're going to take that over. Regulatory, we'll split, because we have various kind of resources and advantages there. Manufacturing, probably big pharma you're going to do it. Sales, commercialization, distribution, big pharma, probably you're going to do it, because you have that infrastructure. The trick is none of this is particularly objective. People are trying to be objective, they're trying to be fair, but everybody has their own interests, and the interests don't always align. So some challenges to the allocation to the shared activities are first of all control. And that's at the heart of why biotechs want to be in these relationships, rather than a license. You know, it's their crown jewel. They want to maintain some sort of control or meaningful control. And so the allocation of responsibility brings with it a certain amount of control. Who controls the process controls the process. And so, that's kind of the first challenge. The second challenges are differences in approach, philosophy, risk tolerance. Just the general ethos of the two different partners. You have challenges around accountability and performance. I don't want to say mistrust, but the view of big pharma that biotech might not have the resources or the experience to perform what they're saying they're going to perform. The general distrust, not distrust, it's a bad term. But the smaller biotech questioning whether big pharma who has20 different Phase 3 programs going at any given time, is really vested in their program. So you have these two parties coming from different places looking at each other with some skepticism. Then you also have the financial aspects of it, allocation, how you're accounting for the assets. And then you have another theme that Marc hit, which was, what happens when working together you pay equally to generate an asset that benefits one party disproportionately. So if you, for instance, on the biotech side, if the biotech is going to take over manufacturing and has to build a plant to do that, does pharma then have to pay 50% of the capital investment to do that? On the flip side, if pharma already has a facility that is underutilized, so they want to put it in there, does the biotech have to bear 50% of the idle capacity of that facility in order to take advantage of it? So you can start to see where multiple different discussions get set up, because the parties are generally aligned but aren't aligned as you go through the line items in the contract. And then when you marry that up against shared costs, and again Marc with a C hit a lot of these, I'll step back through and try to give them some relevance from my perspective. Well, let me stop for a second. That was the objectivity piece of my speech. Shared activities should be objective, but they're not. And so you end up in significant negotiations there. Now I'm moving onto the balance theme. When I have to explain the themes and map them, it means they're not really working but I'm doing my best. So on the balance on the shared costs, it's really easy to say that you're going to have a 50/50 profit split. But like Marc was saying, a 50/50 profit and loss split or cost and profit split, how do you actually make that happen? Because if you have a pile of cash sitting here, you split it in half, that's fine. But what happens when it's not an objective measure like that, and there are unintended costs, there's overruns, there's all sorts of different things that are changing. You have these assets that benefit one party more than another, etc. So in discussing shared costs, you need to really look at who's doing what, but also how you are identifying the costs, how you're allocating them. It becomes really challenging, and some of the themes and some of the things you look at there is, first of all, up front you've got to identify all the potential costs, right? You've got to anticipate them, you've got to budget for them, you've got to put controls around them. And I should also say, all of these issues inevitably at one point, you end up maybe not in a dispute, but in a difference of views. And we'll go into the government's piece, which Marc is about to talk about. But in looking at this, you also have to look at the relative cost of performance, right? In the perfect world, the partner that could perform an activity the most efficiently would do that. But that's not always what happens, and so if you have the smaller partner or the partner with less experience in an area, or fewer personnel assets or smaller teams is the one that takes the lead, you've got economies of scale issue. And you end with the partnership actually splitting a higher cost than you would if things were allocated differently. You also have issues of performance, failure of a party to timely perform. If a party doesn't perform on time, it costs the collaboration or to standard, it costs the collaboration and the other partner money. You also have issues around, and Marc also hit on this, accounting for disproportionate benefit and burden. I already picked on the biotech in terms of building out their facility and why should big pharma need to pay the capital costs here, but it goes both ways. In this context, you may run clinical trials in the U.S. that generate data that facilitate regulatory approval worldwide. And benefiting worldwide is big pharma who holds the exclusive license. So how do you make the biotech whole for paying half of the clinical trial costs, when it's only getting the benefit of half of the profits in the U.S., and that data was used worldwide. The capper is, everything changes, which is another thing I wish didn't happen but it does. The best laid plans here never come to fruition. I was involved in the Wyeth, now Pfizer and J&J, now Janssen Alzheimer's collaboration. And the way these collaborations used to be done between two big parties, these 50/50 collaborations, two big pharma. And I watched the course of that throughout literally my entire career. I became involved with it around 2001-2002, and obviously it's winding down. But things changed so dramatically over the course of that, that they had a very good plan going in. Things just happened. And so all that's a lead-up to, it's not just getting it right up front, it's an ability to move forward. The key is governance.
Marc Rubenstein: Yes, well, we have no time for the key. All I'll say about governance is, the main issue is that, if you're handing over your asset to a pharma, you want them to spend more and more and more. There's no limit to what you want them to spend. You want them to be diligent with your asset. If you're co-funding, that's not necessarily the rule anymore. You want them to spend enough because you want them to be diligent with the asset, but because you're funding half of it, you don't want them to spend necessarily more than you're able to keep pace with. That's not always the case. Sometimes, the biotech partner thinks that the pharma partner is not exploiting or seeking approval in an indication that might be attractive that may be a small niche indication for the pharma. But by and large, the idea here is that both parties are writing checks. Both parties have an economic interest and need to work out the governance, primarily around development activities, development budget, and budget for manufacturing and commercialization. There's lots of flavors here. I know many of the people in this room have experienced that, but that is certainly one of the major complications of the profit split. Apologies to Melissa. I think we're out of time. She's going to follow us. We'll be sticking around for a while if you guys have any questions. Thanks.
Melissa Rones: Thanks Marc and Mark. I'm Melissa Rones, and I'm a partner here in Boston in the strategic transactions group doing primarily IP work. So let's talk about patents. Usually I like to pick a really arcane topic of patent law to talk about. But today I've tried to do something less arcane. And that is that there's been an enormous amount of proposed litigation over the course of 2019 in the patent space. And I'll say, before even getting to it, this is all proposed. Most of this is in very early stages, and will undoubtedly change dramatically, at least in some cases, if it ever even gets to actual legislation. But I think, it's noteworthy for a few reasons. I think first of all, and we're going to go through maybe four proposed pieces of legislation, it really reveals a tension, significant tension that we're seeing a lot of in the news, as well as within the patent bar and within the patent system. And that tension between, on the one hand, the U.S. keeping its position as having a strong patent system, a system that rewards invention, that encourages innovation, which encourages investment. And on the other hand, concerns about the cost of healthcare, drug prices, and whether misplaced or not, a growing view that at least in some cases, the patents contribute in some ways to this issue. So this is the tension that I think is revealed in some dueling legislation. So we're going to cover, or at least talk a little bit about four pieces of proposed legislation. So first the Term Act. The Term Act has this slightly inflammatory stated goal of addressing the rising costs of prescription drugs by significantly limiting evergreening, whereby companies make minor changes to a drug and file for a new patent on those trivial changes to extend their exclusivity and maintain high prices, right. And reasonable minds will disagree about how trivial these changes are. But that's the stated goal of the legislation. It was introduced in early June by Representative Jeffries of New York, and it was referred to the Subcommittee on Courts, Intellectual Property, and the Internet in the end of June. So we're very early in the process. But what the Term Act would do is, it would amend Section 253. This is a section of the patent act around disclaimer. And it would create a rebuttable presumption that a patentee has disclaimed any patent term that extends beyond the term of the earliest expired patent that covers a drug. And so, if you think about this, let's say, in the Hatch-Waxman litigation context, Orange Book listed set of patents, this would create a presumption, a rebuttable presumption, but a presumption that anything beyond that term of probably your base patent, maybe to your composition of matter of your drug is not patently distinct, and you're not entitled to that additional term. For any of you with those kinds of products, you know that probably your whole patent strategy is around second and third generation patents that build on early innovation and provide for additional periods of exclusivity. So like I said, it's a rebuttable presumption, but still, a shifting in the presumption. In addition, the Term Act would require the USPTO to sort of look at its policies and its procedures around managing double patenting and examining things for double patenting, which for any of you who have any experience, particularly on the biotech and pharma side, I don't think that's something the PTO is having any trouble doing in its pretty ordinary course to get those. So I think the key takeaway here is, what the Term Act seeks to do is shift the burden on the patent holder, and put that burden on the patent holder to demonstrate why their second and third generation patents warrant new patent term and corresponding exclusivity. So, this is obviously a shift, right? Otherwise patents are presumed to be valid, and the burden is on the challenger, to show why that isn't the case. Critics have compared this pretty unfavorably to regimes used in sort of patent unfriendly jurisdictions like India and China where the ability to get reasonable second and third generation protection is pretty difficult. And even when you get it, not generally viewed as being particularly strong. They've also noted that this is a real showing of a complete lack of deference to the PTO and their examination procedures, and their ability to actually do this. Because remember, this is only coming up with issued patents, right. This is, you've gotten your patent through the patent office, you've made your arguments for patentability, and this disrupts that. But part of the criticism as well is, would this really change anything? To me, this is a piece of legislation that sounds very tough, sounds like we're going to go out there, and we're going to do something that's going to get generics on the market faster. It certainly would be a real departure in many of the basic principles of the patent system, in terms of presumptions. But does it really change things in a material way, in terms of the timeframe for generic entry? And what I mean is, you've got your patents, you've got your Orange Book listable patents. You're still with the generic challenges. You're still going to be in litigation. I think that this is going to be very fact intensive, right? This is going to all be about non-obviousness and patentable distinctness. So it's going to be fact intensive. It's going to be a battle of experts and of evidence. To me, it's not going to typically be the sort of thing that's going to get resolved on summary judgment. So now you're still looking at protracted patent litigation to resolve this issue, and all you've done is you've shifted the burden. And not that that can't be very meaningful in litigation. It can be very meaningful. But where it's going to be most meaningful is on the margins where that difference in who bears the burden is dispositive. And so to me, this is pretty crucial in the way it changes some very basic principles of patent law in an industry-specific way, alleging to solve a problem, and probably doesn't solve the problem at all, to the extent one believes there's a problem. So to put a pin in that for a second, because there's a second piece of legislation that in some ways tries to do the same thing and took a slightly different approach. But I think you can tell by the name of this legislation where its bias sits. The No Combination Drug Patents Act, creatively named I'm sure. And it's got a very similar stated goal. And it raises the concerns around so-called "patent thicketing." There's been a lot about that. It's been in the news a lot. It's become a bit of a dirty word, as if amassing patents is sort of per se a dirty thing to be doing. But its approach is actually a proposed amendment to Section 103. Right, in Section 103, this is a core of the tenets of patent eligibility. 103 is obviousness and nonobviousness, and would make this sort of industry, technology specific shift and change in 103, once again creating a presumption that these certain types of sort of second and third generation biotech innovation is obvious. So it would create a sort of presumption of obviousness that then applicant, during patent examination not just litigation would have to overcome. Here too, fundamental shift. Examiners have to come forth and make a prima facie case of nonobviousness that then the applicant can rebut. And this is a fundamental shift in that. So similar goals, or at least similar stated goals to the Term Act, but addressing it in a different way. So interestingly enough, although introduced at a very similar time, this bill was withdrawn before markup in the subcommittee. And so we'll see whether or not they take another swing at this, or whether or no folks viewed the Term Act, these two things being not both necessary together, and the Term Act being viewed as a less of the kind of hammer to the patent system. Or whether or not we see this come back in some other form. So, maybe just a couple of things to think about in your own portfolios. Like I said at the beginning, this is far from over. These are early stages only introduced for discussion six months ago. So where they land, and whether or not they even land during this session, up in the air. So the subcommittee is a subcommittee of the House Judiciary Committee. I've heard they're a little busy right now, so that may also delay things. But, I think the things to be thinking about in your own patent portfolios, and this is probably in some ways not very different from what many of you already do in the ordinary course. And that is, to be considering your nonobviousness story very early, again, probably not very different from what many of you are already doing. But if there may come a time, whether through actual changes of the law or just increased public view that some second and third generation IP is inherently a little more suspect, you'll want to be thinking about your nonobviousness story early. And being careful as you always are to avoid statements that would be inconsistent with that. When you think about these things from time to time, find that journal article or that press release or that statement, that has some unhelpful statement about how easy something was, or how clear the solution was or something like that. Not necessarily the most helpful thing, particularly if you may ultimately bear that burden of showing nonobviousness. I think be prepared for the possibility of more double patenting at the patent office, and thinking about managing your portfolios. And finally, I do think this is going to further increase your emphasis during litigation on expert testimony either way. And so be thinking early in your pre-suit investigation phase about, lining up those right experts. So moving on to the other side, so there is a yin and a yang, there's a counterpoint. And that is this concern that we do want to have a strong patent system. We pride ourselves on innovation, on being a place that's friendly to investment. And the Stronger Patents Act. Now I will say, this is being reintroduced. It's been introduced in other forms. It has not gone forward during other sessions. We'll see how it goes this time. It does appear it's bicameral, and there were hearings conducted before the Senate subcommittee in September of this year. And the concern is strengthening the Patents Act, as the name would imply. So it's got many prongs. I'll hit on just a couple, and I want to focus on the first and the last. Now the first is on injunctive relief. So this would restore the presumption in favor of injunctive relief. As some of you may know, that isn't really the current way it goes. And the U.S. is the standard four-factor balancing test for injunctive relief. This would return presumption in favor of an injunction if you prevail in your infringement action. It also seeks to change the standard for bringing a PTAB proceeding. Anyone can bring a PTAB proceeding right now. This would move to have a standing requirement akin to having standing in district court litigation, so it's a pretty significant shift. So, like I mentioned, the change in injunctive relief would overrule the current state of the law in eBay v. MercExchange. That presumption in favor of injunctions is something you see in Germany, some other European jurisdictions. It's very interesting. I was at a conference in October, and the Germans were really flabbergasted by not having a presumption in favorable of injunctive relief. But on the other hand, we're a litigious culture. Europeans can't necessarily understand how litigious we are. And there are issues with things like nonpracticing entities and other entities that have strong patent positions but don't necessarily have products. And this has been a really significant point of debate. Would we be prepared for a system where a life-saving product could be kept off the market by a patent holder, who themselves wasn't in a position to bring a therapy to the market? Would we be okay with that outcome? And then on, just a quick thing on standing. Standing is already a bit of an issue, because you can bring a PTAB action, but you need Article 3 standing. You need the kind of standing you'd need in a litigation to appeal. And that in the life sciences industry has created a real issue where people worry about bringing a PTAB action. Because yeah, I can bring it, but if I don't like the outcome, do I actually have standing to appeal? And could I actually get stuck in a situation where I'm not entirely satisfied with my outcome, but yet, the court finds that I'm not far enough in my own development to have standing to appeal. And this would set that back and also institute it at the very stage of even bringing the PTAB proceeding. So I think, if this were to go forward in this or a similar form, in my view, there would just be no life sciences PTAB proceedings outside of parallel proceedings to litigation. Because no one's going to be able to bring them, unless they're so far along that they'd already be able to be in a declaratory judgment action or an infringement suit. So again, far away, there was a hearing in September. And interestingly, even the panel was split on these issues. Probably why this has been reintroduced. This is a pretty big movement, and a pretty big movement on issues, where I think even the patent bar and even companies are not necessarily allied. You take something like injunctive relief, yeah, if you're the patent holder that sounds great. If you're a company, even an innovative company that has an FTO issue, and you're making the calculus that you're not going to be enjoined, this might shift your calculus. So it's clear why it's a split view. Wrapping up very quickly. Changes to 101. So Section 101, this is changes to eligibility, right. When this started out, this was mostly things that software companies and those sorts of tech companies worried about. In more recent years, this has become a significant issue for diagnostic companies, and for other life sciences companies. Lot of concern that the various court tests by the Supreme Court and the federal circuit have done nothing but created confusion. There's even recent federal circuit opinions where you've got judges saying, "Yeah, I don't like it. I don't like that I have to find not subject matter eligible, but I'm bound by Supreme Court precedent, so you know, talk to your Congressman." So, I do think we will see action here. It will undoubtedly take a while. And it's unclear whether it will solve the problem or add different confusion. Currently, this is an interesting one, because there isn't an actual proposed bill. What there is, is sort of straw man proposals that both chambers are kicking around and having debate and discussion on, in an attempt to actually formulate a proposal. But some of the things on the table are essentially striking all the judicially created exceptions on natural laws and abstract ideas in favor of Section 101 would be construed in favor of eligibility. So, this turns it all on its head and abrogates all the case law. And also really I think all of this says a trend towards, you need to look at the invention as a whole and not sort of dissect the invention and read out all the things that you label as being kind of ordinary course or routine. So we'll see. Stay tuned. And like I said, this is under consideration. I do think on this point, because things are very up in the air, but yet you've got portfolios you have to manage now, here are two thoughts, again probably consistent with your current portfolio strategies is to be drafting new patent applications with both things in mind. Drafting narrowly to fit into guidance that comes out of the PTO and the cases. And there's practically new examination guidelines that come out from the PTO every three or four months to keep up with the cases. So draft narrowly in view of that. But also, don't give up those broad positions in your cases, because it might take two, three years, but you might be looking two, three years down the line and want to go back and pursue a broader claim. And I think if you do have important cases that are really being plagued by 101 issues, consider kicking the can down the road, so that you can go back later, if and when the law changes. So that's it from me. Thanks so much, and I'm happy to take a question or two, or I'll be around at the end as well. So I'll let Kellie come up and then I'm happy to talk at the end.
Kellie Combs: Thanks Melissa. Good morning, everybody. I'm Kellie Combs. I'm a partner in the life sciences regulatory and compliance practice based in D.C. I advise pharma, biotech, device companies on a variety of FDA regulatory issues, both pre-approval and post-market. And I'm going to be talking today about the FDA landscape as it relates to real-world evidence. And just to give you a preview, or to essentially put the conclusion up front, what we'll talk about today is that, although there have been significant strides at the agency with respect to understanding real-world evidence, policy developments, and even acceptance of real-world evidence and regulatory submissions, we still have a long way to go. There's been a significant amount of skepticism expressed by key agency officials about the use of real-world evidence and regulatory submissions, and so I think certainly in the near term, what we're likely to see is real-world evidence being used as a complement to evidence generated through randomized controlled clinical studies is going to be adequate and well-controlled trials that we're used to, rather than real-world evidence being a replacement for those types of data. So just to get started and set the framework for everyone. There's been, of course, a substantial increase in the availability of real-world data and real-world evidence and progress in the evolution of technology and the ability to mine big data. So, for example, we now have electronic health records. We have mobile devices, we have wearables. A lot more data are collected from individuals in the day-to-day setting. And certainly, we have a greater ability to really mine that data and leverage it in various real-world settings. FDA distinguishes between real-world data and real-world evidence. So real-world data is data that relates to a patient's health status or healthcare delivery, and it can be collected from a variety of sources. Real-world evidence is essentially what you do with that real-world data. So it's the evidence that's collected about a particular medical product or device, some sort of intervention that's derived from the analysis of that real-world data. In light of the advances in technology, Congress enacted the 21st Century Cures Act a couple of years ago in December 2016. The 21st Century Cures Act was really an omnibus bill that covered a lot of FDA and healthcare issues. Among other things, the Cures Act requires FDA to evaluate the potential use of real-world evidence, but only in two specific ways. So the Cures Act applies only to approval of new indications for drugs that have already been approved, or to help support post-approval requirements, particularly as it relates to product safety. And the Cures Act also requires FDA to take a number of steps to develop policy about the use and analysis of real-world evidence. FDA is so far carrying out its obligations, as laid out in the Cures Act. Last year about this time, FDA published something called the proposed framework for real-world evidence. We'll discuss that in more detail in a moment. The Cures Act also requires FDA to consult with a number of stakeholders including pharma, biotech, and big data companies to really learn how real-world data, real-world evidence can be collected and leveraged in the regulatory process. So moving onto the next slide. What we've seen so far is that even though FDA is developing policy, with respect to real-world evidence, there's still really a lack of clarity. And so far, all the agency has done is kind of laid out some high-level principles. So I mentioned a moment ago, the framework that was published about a year ago. It sets forth at a high-level, FDA's general approach to evaluating real-world evidence, for both safety and efficacy purposes. But it doesn't provide any details on study design. It doesn't provide any details on how FDA will view real-world evidence as potentially satisfying regulatory requirements. So just to pause here, and I'll use drugs as a key example, the statutory standard for approval of drugs requires that FDA find there to be, quote, "substantial evidence of effectiveness." And that term has been interpreted in regulations by FDA as requiring what are called adequate and well-controlled studies. So in most cases, these are the randomized controlled clinical trials that we're all familiar with. FDA's never opined on whether real-world evidence can in fact, satisfy that statutory or regulatory standard. When does real-world evidence constitute an adequate and well-controlled study? We don't have any details on that yet. And so that's a major open question. There's also no direction in the proposed framework about reliability of real-world evidence, what sponsors should be considering when they're generating data, analyzing data sets that have already been collected. There have been a couple of recent workshops, joint workshops, collaborations held by FDA and the Duke-Margolis Center, where a variety of participants have spoken from the perspective of industry, from the perspective of patients and big data, really trying to impress upon FDA the key considerations that the agency should be thinking about as it develops policy in this area. As a general matter, most of the content at that workshop has focused on use of real-world evidence generated within randomized controlled clinical studies. So there's still not much discussion about use of real-world evidence outside that controlled clinical trial setting, or for example, how companies may be able to leverage real-world evidence from prescriptions claim databases or observational data that's collected from your Apple watch. Still not much yet from FDA on how industry or others should be thinking about those specific issues. I want to highlight here a few recent drug approvals, and in some cases, a drug that was not approved on the basis of real-world evidence. Because I think these examples really underscore the way that FDA is currently thinking about real-world evidence. The first is Pfizer's Ibrance. So Pfizer's Ibrance has been on the market for a number of years now, and was approved originally for the treatment of breast cancer in women. Earlier this year, Pfizer got a supplemental approval that expanded the indication to apply to men as well. And that approval, the data that was submitted in connection with that supplemental application was based on electronic health records and post-marketing reports of use in men from the IQVIA insurance database, as well as Flatiron Health's breast cancer database, and Pfizer's global safety database. And what was interesting about that supplemental approval is that, even though nearly all the data that was submitted to get the label expansion for men was from real-world evidence, FDA made very clear in all of its statements about the supplemental approval that it was the original clinical trials conducted in women and submitted in connection with the original application for the drug that satisfied substantial evidence, that statutory standard that I mentioned earlier. And so FDA made really clear that it was just the real-world evidence as the supplement or a complement, rather, to the initial clinical trials that were conducted. The second example is Amgen's Blincyto. This is a drug that was approved for ALL, and there, real-world evidence was used as benchmark data for a single-arm registrational trial. And that single-arm trial that used real-world evidence was sufficient in FDA's view to support accelerated approval for the product. That said, as a confirmatory study, FDA is requiring Amgen to conduct a traditional randomized controlled clinical trial in the same exact population, in order to confirm the clinical benefit. And finally, I think actually one of the more interesting examples is something that just was reported in the trade press a couple weeks ago. A company called Correvio has a drug called Brinavess. It's a cardioversion drug. It's been on the market in Europe for almost ten years at this point in time. However, while the product application was pending at FDA, there was a patient death, and so FDA put the product on clinical hold. And the product has not progressed in the U.S. in those ten years. However, because it got approval in the European Union, the company now has all this post-marketing data, including observational data in more than 2,000 patients in the EU. And the company essentially tried to revive the application on the basis of this real-world data. And an advisory committee at FDA expressed serious concerns and voted against approval of the product, because they said that, observational data was subject to selection bias. And there was a real problem, it was not sufficient to support an approval in the U.S., because the real-world data simply meant that doctors were able to decide who was getting the drug and who was not getting the drug. And FDA was not confident that doctors in the U.S., if the product were actually approved, would be able to make those decisions in the same way. So just to close out briefly, I mentioned that there is a real lack of clarity, and still significant amount of progress to be made, with respect to real-world evidence at FDA. Just to tee up some of the more interesting outstanding issues from my perspective, so as I said earlier, we still don't have any information from FDA about the extent to which specific clinical trial designs incorporating real-world data or real-world evidence could be used to support a regulatory finding, specifically as that regulatory finding relates to effectiveness. I think we have seen and will continue to see FDA being significantly more flexible with safety data than effectiveness data. We still don't have any information about how FDA will consider real-world data or real-world evidence to be sufficiently reliable, or what gaps there may need to be that sponsors may need to address. And then, finally, on the last slide, some other really significant issues. So we still don't have a good sense yet, and I think there's significant amount of work to be done, both clinical work, as well as policy development, about the selection of endpoints as it relates to both safety and efficacy for real-world evidence. So just for example, the proposed framework that was released last year provided no information about endpoints that may be appropriate in various types of analyses. We don't know when a real-world evidence endpoint will be sufficient, as opposed to a commonly accepted endpoint that's already been validated, for example, through clinical studies. Another interesting issue here is the interpretation of regulatory requirements. So just as one example, electronic health record systems are not typically under the control of a company or a sponsor or an investigator. And they instead belong to the health system, or they belong to the big data company or technology firm. So sponsors may not have direct control or even kind of unfettered access to that data that may be required to comply with some of FDA's requirements. So for example, if the agency comes in to inspect clinical study records as collected through real-world data or real-world evidence, the sponsor may not have continued access to them. Or they may be significantly limited in the extent to which they could use them, hold onto them, provide them to FDA and so on. It's also important to avoid pitfalls of real-world evidence utilization. It's unclear that people at FDA or people within the companies that are going to be developing and analyzing the data really understand the regulatory requirements, and special considerations as it relates to real-world evidence. There are certainly I think going to be varying expectations at FDA. Already we know that there's a lack of clarity, but it's also very unclear how regulators across the world will consider the use of real-world evidence. And if, for example, you can beat FDA's regulatory standards, as amorphous as they are, will you for example be able to meet standards ex-U.S.? And then finally commercial considerations. And this I think is particularly interesting, because what we are seeing, and this is no surprise, is that payers, just as one example, are significantly more flexible and more innovative and more willing to accept real-world data, real-world evidence, for example, to show the clinical utility of the product or the cost-effectiveness of a product. And so many companies that we're working with in the FDA regulatory practice are using real-world evidence in really interesting, innovative, and substantial ways. But they're using it for commercial purposes. So they're not even submitting analysis to FDA. They're using it instead in their discussions with payers. So I will stop there in the interest of time. But I'll be around afterwards as well, and I'll turn it over to Mark and Val.
Mark Barnes: Hi, good morning. We're going to be very brief. We're talking about an issue which we have dealt with extensively among our academic clients, medical centers and universities in regard to alleged foreign influence on U.S. research, including theft of intellectual property, by way of basically using U.S. researchers and scientists as conduits to steal intellectual property from the U.S. and from U.S. entities and the U.S. government. And Val, go ahead.
Valerie Bonham: Qualifying that it's intellectual property in all the ways you traditionally think of it, but what you might think of as intellectual capital or knowledge. The federal government has been clear that they are concerned about preclinical data and knowledge, as well as intellectual property.
Mark Barnes: That's right. So Val is going to take you through some of the basic background. And then I'll talk for just a minute about how this affects industry. This has hit primarily in the area of universities and medical centers. You've read about this. It's been published in the New York Times. It's been covered in the Wall Street Journal about all of the investigations going on. Val will tell you about that, and then we'll talk about how this actually is, perhaps, a harbinger of things to come in the industry space.
Valerie Bonham: So as Mark stated, there's rising tensions. This is a selection of headlines. But it's a month old. There's been a lot more in the last month. So one of the key things to understand is that these are rising tensions from all parts of the government. So if you're a funder, you're the NIH, the NSF, some of your basic science partners, or you're clinical trial partners, they are significantly more seriously scrutinizing the activities of their awardees than they did one, two, three years ago. But as well, the FBI, the State Department, Commerce with regard to export controls, there's sort of this whole government approach. The government's not especially great at being terrifically coordinated. But this is a place where certainly with the benefit of the hindsight from the last two years, you've seen more coordination. And it is bipartisan, and it is important to remember that. This is a complex issue, but it is, in fact, very much bipartisan and bicameral. And folks on the hill are driving the government to attend more carefully to these concerns that the Federal Bureau of Investigation has been raising for a couple years now. The gist of the problems, and we can talk at length, but we want to be quick to make sure we're targeted for you, is arrangements, so-called talent program arrangements which are using the knowledge and the interest and the commitment of U.S. and other geographically based scientists. The Chinese government has undertaken a systematic effort to utilize those strengths to advantage itself to leapfrog basically through some of the process of developing science by utilizing the knowledge of those who've been there before. From the funders' perspective, it gets into undisclosed conflicts of interest, undisclosed support for research. And conflicts of interest include both financial and professional, academic, consulting, et cetera. The National Institutes of Health has been very much out in front on investigating the activities of awardees. As we said, this is about so-called nontraditional collectors, your scientists inadvertently leaking, disclosing, releasing information, and not being transparent about it to their employers.
Mark Barnes: And that includes information, for example, that they're developing in their laboratories that's not yet been patented necessarily, not even been disclosed to the technology offices yet, and not been presented even at scientific meetings as fundamental research. And so, as Val said, what the Chinese government, the PRC, not the Taiwan government, not the Hong Kong government, but the PRC government has tried to do through these things called the talents program is basically give these kinds of awards to individual investigators primarily in the U.S., but also in Western Europe. And they've done it at the highest levels of American science. And people have accepted this money and these awards at the highest levels of American science, not disclosed the stuff to their own institutions. And part of the obligations that these American scientists incur when they agree to accept the talents program is basically that they will spend a certain amount of time in China, perhaps develop their own lab in China that works with their lab in the U.S. in a way that's undisclosed to their American institution. That they will take PRC postdocs here into the U.S. They'll even pledge to take a certain number of PRC postdocs into the U.S. Haven't disclosed it to their own institution where they're finding these postdocs and why they're hiring them. But they're hiring them, because they pledged to do it as part of their talents program. And the money is not huge. You get $150,000 when you get the talent award. And then you get something like $50,000 to $100,000 a year as a salary. But you also get $1 million U.S. to spend on your research in China. And so the technology theft is really more about preclinical research, and it's about stuff that hasn't even gotten to the PTO yet.
Valerie Bonham: Yes, and it's kind of a sweep.
Mark Barnes: You should give them the number of the institutions too.
Valerie Bonham: So just taking NIH as an example, they have affirmatively sought information from roughly 180 individuals, 70 or so institutions. And what's really noteworthy is that, of those, they have found substantial and serious problems with 75% of the cases that they've done a deep dive on. So what that translates into is, the problems are touching just about every significant institution that the agency funds, or big players in this space.
Mark Barnes: And we're advising about one third of the 70 institutions.
Valerie Bonham: And the other thing that's noteworthy here is, typically, grants and grants oversight just doesn't rise to the level of the Justice Department very often. It is rising much more so, because of this sort of whole of government concern. In the interest of time, I'm not going to go into the finer points of NIH regulations, though happy to discuss it any time. Again, the gist of it is this integrity concern about distorted funding, but underlying that is a much more serious concern about loss of scientific advantage and economic advantage. And it's a complex issue, but the agencies have made clear that it is an issue about behavior and conduct, and not an issue about targeting individuals of a particular ancestry. And we have many cases for which that is very obvious, but the agency is not necessarily as transparent as you might hope with regard to that. So that the issues get lost, and they get complicated by quite reasonable inferences that folks have about what the government is doing. I don't think totally correct, but quite reasonable.
Mark Barnes: So, the background for us as industry, and the background actually even for this for NIH and for the National Science Foundation and Department of Defense, there're really two things. One is that they do have grant terms and conditions that require transparency by investigators and institutions about all of these external commitments, these potential conflicts of interest, getting money from foreign powers and things like that. All of that is required as being transparent to your own institution as a scientist, and the institution being transparent to the U.S. government funder. Those are regulations, those are requirements. If you don't do that, it's a potential faults claim that you submit to the federal government when you draw down money on the grant that DoD or DOE or anybody else has given to you. Then there's another set of regulations with which we are more familiar, which is the issue of export controls. And there are these controls that are these regulations that are so voluminous and so dense that you actually have to have a special software package even to understand how they apply to a particular technology. But there are technologies in the U.S. on which there are severe limitations placed by the federal government for the export of that technology. Mostly stuff that is national security sensitive, but not only national security sensitive. And then there's a deeming situation, in which, if you train a foreign national in that technology in the U.S., that is deemed to be an export of the technology, regardless of whether you ever sent the technology outside the U.S. because the inference is that the person once trained could go back to his or her country and take the sensitive technology with them. There have been many enforcement actions having nothing to do with this NIH situation or the Chinese influence in regard to export controls, and the violation of export controls by individual scientists and individual people in the U.S. and companies that have sent sensitive technology abroad for one way or another without getting the kind of approvals that are necessary. Sometimes you can't even get the approval, but there is an approval process that one can go through. And so that's the background of this. And so then you get to where we are with the NIH and NSF and Department of Defense, making these inquiries that Val has talked about. So the question is, how does this affect industry? Well, one way it affects industry is that some entities in industry actually take money in small quantities from the NIH for collaborative research. Those grant terms and conditions attach to that, which means that there are disclosure obligations on industry entities just the way there are on this, in regard to academia. There also are SPIR grants, and you have to look at the SPIR grants. If you get one, especially if you're a small startup, that's more common obviously to get a small business research funding from the U.S. government, particularly from the NIH. But there are grant terms and conditions and disclosure obligations that go along with that. Then there's the issue, even if you're the biggest pharma company in the world, even if you're Pfizer, Merck, J&J, Amgen, you may be funding scientists in industry through your sponsored research program, either your investigator initiated programs, or they are site PIs for your clinical trial. Or they could be the data coordinating center for your clinical trial. And so you are supporting the salary of an investigator. It is not unthinkable that one of those key opinion leaders is also one of the 200 people who's under active investigation by DOJ and by NIH and by the FBI. And the FBI, believe me, is all over this. And then there's the question about, in the future how all of the export controls issues and an imminent expansion of the amount of technology and the categories of technology that export controls cover. That is in the cards and being done right now by the Department of Commerce and the Department of State, this expansion to areas of technology to which export controls have not been applied before. So you've got that, and then you've got the fact that multinational pharma, multinational device and biotech, they are all over the place. They have people coming and going, and you need to be very careful about what technology you are exporting, and whether any of it falls under export controls. Whether any of it was developed with NIH or DoD, DOE, NSF money. You don't have to be a weather vane to know which way the wind is blowing on this. They've started with academia, but it is entirely possible that they will move into industry and into examinations of leakage of sensitive technology through industry scientists into China and also into Russia. That's the other real target of this.
Valerie Bonham: And so to try to make the point that, from the government's perspective, what they have found is that across the board, there are concerns that the very value of innovation, of partnership, of global collaboration, is undermining the U.S. economy, U.S. scientific position, et cetera. And it is at first hard to get your head around. I think it's hard. Particularly in the basic sciences, and in fundamental research where we have for decades valued and aspired to have more exchange of information, knowledge and creativity. But where the government is coming from is that very value is contributing to a substantive and serious undermining of the U.S. position, which is affecting federally funded activities and non-federally funded activities. So some of the cases in aerospace and in some other fields. I happen to focus most of my life in medicine and basic sciences, but in other fields, you also see more prosecutions. And so for non-federally funded entities, those that have no touches with regard to the federal funding system at all, there's still a concern here that internal controls perhaps need to be examined when we talk about visiting scientists, or we talk about collaborations. And I say that with full recognition it's a very tough issue. It's really tough, because of how it strikes at our values. But the comprehensive approach the government has taken is telling us that, not only in academia, but also in the private sector, it's important to begin to pay attention. Again, we're seeing more criminal litigation. I'm just jumping through this in the interest of time – I apologize for that. But I know we're at time, so if anyone has any question, or we can speak afterwards.
Audience: I don't have a long question, but do you have information that you can share with us, you know, afterwards about what industry is doing? You mentioned, you know, investigators, sponsored trials and even clinical trials to some respect. What should we be doing as part of those arrangements to be in front of these issues? That would be really helpful.
Mark Barnes: Yes. One thing that I would suggest you all do is make sure that your compliance departments and your legal departments are really briefed on export controls and how they apply, and whether there's any technology you deal with that is subject either to current export controls or is being dragged into it by the amendments that are imminent. There was congressional authorization in the DoD Reauthorization Act in 2019 that actually directed the Department of Commerce to expand the list of sensitive technologies. We've been surprised at the number of very sophisticated academic institutions and also industry entities that actually have not had in the past a significant export control compliance capacity. As part of the sentencing guidelines, you can make a mistake, but you damn well better have something in place that actually looks like a compliance program, right. That's part of the game.
Valerie Bonham: Thank you very much.
Marc Rubenstein: Okay. That concludes it. First of all, thank you to our panelists, many of which will be able to stick around afterwards if you have questions. Thank you everyone for coming. I know we went over, so thank you for sticking through it. And the last piece of this is, for those of you going to JPMorgan, hopefully you received your invitations. We have events Sunday night and then a very large event on Tuesday night, which has about 600-700 people. So thank you for coming, and we'll see you next year.