Forget Mount Everest: Try Overcoming This Patent Cliff

One of the most crucial IP-related stories to be played out over the next few years is the manner in which Pharma deals with the impending patent cliff at the edge of its patent portfolio. Simply put, with a significant number of blockbuster drugs set to come off patent protection over the next few years (if they have not already done so), and the relative paucity of a new generation of patents to support a further generation of patent-protected blockbuster products, the question is how the industry will cope with this looming threat to its current business model.

Against this backdrop, collaboration is all the rage. The most recent example of such coping behaviour, as reported by Reuters, was announced last week, whereby Amgen and AstraZeneca agreed jointly to develop and sell five new biotech products that are in various stages of development at Amgen, here. Under the agreement, Amgen, the world's largest biotech company, will receive an upfront payment of $50 million. The companies will share then share both costs and revenue for drugs in several disease categories--autoimmune, inflammatory and respiratory ailments.

There is almost a textbook-like quality to the rationale offered for the deal as described in the Reuters article.

1. "The collaboration will provide Amgen with additional resources to help advance its product portfolio and give Astra access to new medicines at a time when its own pipeline is relatively barren and it is facing competition from cheap generic versions of its big-selling antipsychotic drug Seroquel". Stated otherwise, while Amgen is hardly a small actor in the biotech space, its strength still resides in its R&D capabilities, while AstraZeneca seems almost prototypical in its need to obtain new products and technology that it can then leverage at the marketing, distribution and sales levels.  

2. " 'We have a lot of things that we want to move forward and there are financial constraints everywhere with how much you can do," Joe Miletich, Amgen's senior vice president for research and development, said in a telephone interview. ... We still have many more things that we're still moving on our own, and this actually will help free some resources so we can continue to innovate in bringing some of the programs in our earlier pipeline along in a way that might not have been possible if we were funding these all on our own,' Miletich said." Stated otherwise, while Amgen may be the proverbial 800 pound gorilla in the biotech space, even 800 pounds is not enough to support the full complement of skills and resources needed both to develop and bring to market new drugs.

So is this as close to a "win-win" collaborative arrangement as one can hope for in the inherently high risk world of drug development, whereby each party to the agreement brings its particular competency to bear? Or is this yet another example of "me-tooism" in an industry desperate to find workable models in the face of the looming patent cliff and the relentless challenge posed by generic companies to the existing product mix?

Seer-like skills are beyond my pay scale, but others seem less daunted. Particularly telling are the words of Geoffrey Porges, a biotech analyst at Sanford Bernstein. Thus Porges makes the following acerbic observations:

1. " 'It's hard to see what AstraZeneca brings to the table other than cash and the ability for Amgen to maintain their share buybacks and dividends,' Porges said, conceding that Astra does provide some global commercial reach that Amgen lacks."  

2. " 'The fact that Amgen has to partner yet another one of their strategic initiatives isn't really going to fill investors with very much confidence,' said Porges". 

 But the problem of investor confidence is not limited to the Amgen side of the equation. The article reports that AstraZeneca has notably failed in developing experimental medicines for depression, ovarian cancer and diabetes. If the collaboration is meant to allay such investor anxiety, then the critical comments from an analyst such as Porges, affiliated with a prominent financial company, augurs poorly in that regard, at least for the short term. The more troubling question is whether, if Porges is right, there is any promising model that offers a reasonable of enabling Pharma to successfully deal with its patent cliff problem. The forthcoming Facebook IPO may be the hottest discussion topic in the high tech world, but something tells me that the resolution, or lack thereof, of Pharma's patent cliff problem will have greater long term consequences for both business and societal well-being. Media -- take note.

Collaboration and IP Rights: But What About Those Transaction Costs?

Surely one of the main themes of the past decade has been the rise of collaboration in R&D and innovation. Whatever one's slogan--"You collectively is smarter than you individually" or "No more 'not invented here'", both popular and and academic literature are replete with accounts of the challenges and rewards of collaboration as opposed to go-it-alone development. Aided by the universal reach of online communications and infrastructure, as well as the global movement of ideas, resources and manpower, collaboration is championed on both substantial and process grounds.

Against the almost epiphanic adulation in favour of such collaboration, however, there remains a dirty little secret: it is often times devilishly difficult to find a workable arrangement for the allocation of IP rights in such circumstances. Just one example --the mind-numbing exercise of distinguishing between "Background IP" and "Foreground IP" has become a common nightmarish staple in fashioning collaboration agreements. More generally, the challenge of establishing a workable framework for determining ownership of IP rights, both individually and jointly, is daunting under the best of circumstances and is a potential show-stopper in less favourable situations.

It is against this backdrop that I recently read an account in the December 7, 2009 issue of Business Week ("Can Roche Leave Genentech Alone?") of the efforts by Roche to implement its acquisition of the 44% of Genentech that Roche did not previously own (in early 2009, we discussed the Roche-Genentech acquisition on this blog here.) One comment in the piece particularly caught my attention: the observation that the acquistion will finally allow the two companies to work together in an effective manner on what is termed "personalized medicine", with the goal of developing "diagnostics", namely the development of the technologies used by doctors to ascertain better which drugs work with which patients.

What exactly was the reason that the development of these "diagnostics" did not take place before the acquisition, even though Roche already owned over 50% of Genentech? According to the article, the reason centred on the issue of IP rights. "When they were separate, Genentech and Roche rarely tried to codevelop diagnostics, because it took too long to work out patent rights and other legal logistics. 'Now there's no intellectual property discussion, there's no negotiation -- we're the same! ... You wouldn't believe how much easier it is.' "

At first glance, this observation seems to be a testimony to the frictions created by transaction costs with respect to IP rights in collaboration arrangements. In particular, as noted by Wikipedia, "Bargaining costs are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on." Here, the argument seems to be that the bargaining costs in arranging for the disposition of IP rights in a collaborative relationship were, at least with respect to the Roche-Genentech relationship before the full acquisition, prohibitive. The result was that wide collaboration regarding diagnostics did not appear to take place.

There is something disturbing in all of this. Can it be that the transaction costs in bargaining the disposition of IP rights in a collaborative arrangement between two separate parties are so daunting that the only feasible solution is for the two parties to merge, thereby eliminating the friction in the contractual bargaining? Think about it: If the answer is "yes", then it calls into question the ability of lawyers to fashion arrangements for collaboration, other than an outright acquisition of one party by the other (was not Oliver Williamson the co-recipient of the 2090 Nobel Prize in Economics for studying this kind of thing?)

Surely (at least I would like to think "surely"), however, lawyers and their clients engage all the time in reaching an arrangement for the disposition of IP rights in collaboration agreements in situations other than an outright acquisition. Sometimes the negotiations over which party will own what IP rights in a collaboration are less rocky, sometimes more so. As the report on Roche and Genentech indicate, sometimes the collaboration dies a legal stillbirth.


Given this range of possibilities, it seems to me that the better question is how we should understand the parameters for effectively bargaining this disposition of rights in the more typical collaboration arrangement, when acquisition of one party by the other is not on the table. Against this background, we can then perhaps better understand what were the particular factors in the pre-acquisition relationship between Roche and Genentech that seem to have paralyzed any effective bargaining of IP rights between them, at least with respect to diagnostics. There may be an interesting MBA case study here to explore these questions. Any takers?