Biotechnology companies are familiar with partnering deals that divide global markets into geographical regions based on the drug sales profitability of those regions. Although these geographical strategies are becoming more varied and nuanced, a common division is to create one region comprising the U.S., Japan and the European Union, and another region, aptly titled the ‘rest of the world’ or ‘ROW,’ comprising the rest of the world. The rationale for this division is that the major markets in terms of sales and profitability are in the U.S., Japan and the European Union, and the ROW counts little towards the bottom line. This division informs drug development and commercialization in two main ways:
(i) in drug partnerships between biotechs and pharmaceutical companies, the ROW will often have lower royalty rates and lesser commercialization objectives since the main focus of the deals is on the major markets; and
(ii) drugs that treat diseases that occur in the ROW but not in the major markets may not be developed.
Advocates for health care in developing countries have long noted the geographical inequities in access to health care created by this division of global markets. However, in recent years, sophisticated agencies have formed, such as the Grand Challenges in Global Health Initiative and OneWorld Health, which have begun using pharmaceutical industry’s differential approach to the ROW to their advantage. First, organizations can sometimes acquire on favourable terms the commercialization rights to drugs held by pharmaceutical companies which do not have a profitable application in the major markets, and then bring the drugs forward for treatment of developing world diseases. Second, organizations that advocate improved health care in the developing world have been funding drug development on the condition that the organization receives commercialization rights for the developing world. In other words, the funding organization cedes the major markets to the pharmaceutical companies where their focus lies, and in return obtains the right to commercialize the technology in the developing world if the pharmaceutical companies don’t subsequently put sufficient effort into making the drug available in the developing world. This article will discuss some key considerations in concluding these types of arrangements with funding agencies dedicated to advancing developing world health care.
McCarthy Tétrault Notes:
Doing Deals with Funding Agencies for the Developing World
For biotechs conducting early stage research, agencies interested in bringing biotechnology to the developing world can provide vital funding for research and development. In structuring these deals, there are a number of points to keep in mind.
Definition of ‘Developing World’
One issue is which countries comprise the ‘developing world.’ A typical definition would be those countries defined as ‘low income’ or ‘low middle’ income by the World Bank. This list includes countries such as China and India, which currently have affluent population segments that represent a potentially lucrative market for drug companies, and that are expected to turn into major markets in the future. In granting commercialization rights to the ‘developing world,’ biotechs may wish to try to limit the grant to benefit those people in developing countries who are in need, or to preserve the biotech’s ability to remove countries from the definition of ‘developing world’ when those countries become important markets. Needless to say, making the definition of ‘developing world’ variable over time creates complications for the contract, as well as for the biotech’s commercialization strategy.
Loss of Major Market Exclusivity
Drug development and commercialization is a costly exercise, and the money to bring a drug to market in a developing country must come from somewhere. One strategy is to take profits earned from sales in the developed world and spend them on making the drug available in developing countries. Accordingly, although the purpose of the funding agencies is to make drugs available to the developing world, they may preserve the right to make sales in developed countries in order to fund drug availability in developing countries. The implication for the biotech company is that, by accepting the funding, it will in effect create a competitor to its own commercialization plans for the major markets. The biotech may want to ensure that the commercialization rights held by the funding agency do not permit sales in major markets. Note that even if the funding agency does not insist on the ability to make sales in major markets to fund developing world drug availability, drugs that are distributed in the developing world may nonetheless find their way into developed world sales channels through the ‘grey market.’ Finally, the funding agency will usually preserve the right to conduct development and manufacturing activities in the developed world, since that is where scientific and manufacturing resources are located.
Reach-Through Clauses into the Biotech’s Core Technology and Improvements
It may not be commercially problematic for a biotech to grant rights for the developing world for its ‘orphaned drugs.’ However, funding agencies often also require ‘reach-through’ rights into the biotech’s background technology that is also needed to develop the orphaned drugs, or else to the biotech’s future improvements that are also relevant to the funded technology. The result can be that the biotech can inadvertently lose control over the development of its core technology. This is particularly a concern since the funding agency will not conduct the future development itself but rather will use its rights to fund others, such as the biotech’s competitors, to conduct the research and development activities.
Rights of First Refusal for Future Funding
As noted above, the funding agency will not conduct the drug development itself, but rather will fund others to do it. A term the biotech may wish to obtain in its funding agreement, therefore, is a right of first refusal for it to be the one to conduct any future funded development by the agency into the technology. Often the reason that biotech is not developing the drug in the first place is that it does not have sufficient funds for that particular technology. An RFR (right of first refusal), therefore, can preserve the ability of the biotech to perform that development if the funding agency puts future resources into the technology. In this way, the biotech can keep the technology in-house, despite the grant of developing world rights to the funding agency.
The funding agency will typically require the assignment to it of any patents covering the funded technology that the biotech decides not to prosecute. The biotech therefore could end-up transferring ownership of the funded technology to the funding agency, as opposed to merely granting rights to it for the developing world.
Reporting and Approval Requirements
The funding agency will often require its approval for all future development, partnering and patenting of the funded technology, not just for the developing world but also for developed countries, in order to ensure that its rights are protected. Administering and reporting on the biotech’s activities vis-a-vis the funded technology can add up to generate a significant amount of work.
Research and Development Networks
Funding agencies very often structure their development activities as networked collaborations among scientists at various institutions and companies, depending on the expertise required for different aspects of the project. The biotech participating in one of these networks will want to ensure that appropriate controls are in place in terms of which other entities may access the technology contributed by the biotech, and what those entities can do with it after accessing it. Non-disclosure, material transfer and licence agreements can be mandated for use by the funding agency in its dealings with its network, to ensure that the other members of the network cannot use the technology for purposes outside of the project and its mandate to benefit the developing world.
Flow-Through Clauses to the Biotech’s Collaborators
The funding agency will require that its rights to the funded technology are flowed-through to whomever the biotech does business with in the future, such as the biotech’s subcontractors, licensees and collaborators. This requirement may create complications the biotech in concluding deals with future partners for the commercialization of the technology, particularly if the rights granted by the biotech to the funding agency were not carefully thought-out in the first place.
Significant funding is available for research into health issues that disproportionately affect the developing world, such as:
- infectious diseases that have been largely eradicated or aren’t present in the developed world (addressed by research into vaccines and treatments);
- poor nutrition caused by harsh climates and poverty (addressed by research into genetically modified crops); and
- poor health care delivery (addressed by developing diagnostic tools that are cheaper to make and suitable for use in remote and
- underdeveloped areas, among other strategies). For example, the Grand Challenges in Global Health Initiative advertises that it has offered grants of US $436.6 million for these types of projects. Access to these funds by biotechs can open doors to performing interesting and important research that otherwise might not be funded. However, as with all complex intellectual property arrangements, the implications and consequences of the funding arrangements must be carefully thought-out to ensure that the biotech retains control over its IP in the core areas of its long-term commercialization strategy.