In this section we turn our attention to the specific issues for upstream and intermediate companies in transferring their technology further downstream. Challenges exist both for researchers and companies wanting to move their technology or products out, and for companies seeking to add value by further developing technology. As a global market, biotechnology has some unique features. Most notably, a vast majority of the private sector players are small to medium-sized companies, and the business of biotechnology is very distributed. The cumulative nature of biotechnology research means that intellectual property needs to be assembled in order to develop a platform. As one company respondent commented, “you need to license in three patents to get one out.”
Technology transfer strategies
Few participants in the industry have the ability to “go it alone.” Many industry participants in Australia are involved in drug discovery but very few produce the final products. As one respondent put it “we will not produce a product for anyone ever”. The reasons generally given are both that the costs of clinical trials are simply too high and that it would be wishful to think that a small Australian company could compete with a big multinational. Thus, “it is better to get in bed with [large pharmaceutical companies]”.
One consequence of this is that most Australian companies are unlikely to raise revenue from product sales, either at present or in the foreseeable future. On-licensing to more downstream companies is far more likely to be the primary source of revenue for most companies. As such, licensing-out of intellectual property and associated know how would appear to be the most important strategy for many Australian biotechnology companies. Although the terms of technology transfer agreements may frequently be contentious, it is probably fair to say there were few cases where technology transfer did not proceed at all once negotiations had commenced.
One industry sector that is a notable exception to this licensing trend is the device sector. Device companies do not tend to license-out their technology but supply directly to end-users. Interestingly, some of the most successful companies in the Australian biotechnology industry are device companies. Two companies, Cochlear and Resmed, have been particularly successful.202 This success may in part be attributed to the lower regulatory requirements for devices when compared with drugs. These same arguments could also apply to the diagnostics sector of the industry, for the same reasons. However, the two respondents to the diagnostics survey who reported that they owned patents both said that they licensed-out their technology.
Attracting downstream partners
In order to survive and expand, upstream drug development companies must ensure that they have projects that are attractive to downstream companies. Ideally, these companies are looking to add value to research institution inventions and to sell or license their projects to one of the large multinational pharmaceutical companies. However, large pharmaceutical companies are only interested in potential blockbuster drugs that are likely to be worth AU$1 billion. Although the large pharmaceutical companies are constantly trawling for potential new products, they can pick and choose from many options. Consequently, if there are any problems with a particular project it is unlikely that it will be chosen. On the other hand, some respondents noted that if the technology is good enough there will be a willingness to work through any impediments that stand in the way of product development, irrespective of how intractable they might appear. Nevertheless, even when this is the case the route from invention to product is not an easy one. In response to the question “if there is a good invention is it easy to commercialise?” one research institution respondent answered:
No it is an extremely hard slog. It takes a lot of work on the part of the researcher and a lot of institution resources. In one case it split the lab because a spin off company was formed. This took a huge amount of time
202
See, for example, M.N. Barber ‘Research Priorities for Australia: Setting Our Future’ Telstra Address to the National Press Club, Canberra, 26 June 2002, available at:
http://www.science.org.au/academy/media/26june02.htm (accessed 20 November 2003).
and good people were lost to the spin off company in the process.
Many respondents from companies seeking to maximise the commercial potential of their technologies or products commented on the difficulties in attracting partners and reaching a negotiated agreement. In many cases, respondents felt they had little choice in selecting partners, and characterised the market as a “buyers’ market”. Some companies have managed to attract attention and garner an international presence, but a considerable number are still grappling with finding partners interested in their technology. The main issues that arise for these respondents is gaining and maintaining exposure among investors, and communicating the marketability of their product.
In relation to intellectual property, problem areas were identified as unclean patent ownership, uncertain validity and insufficient scope. Each of these problems might make a particular project unattractive to potential downstream licensees. For example, one respondent reported that clean chain of title is essential because “if intellectual property is not clean, pharma will not touch it”. These intellectual property issues form the basis of much of our following discussion. However, it must be acknowledged that there is a whole range of other problems, not associated with intellectual property as such, including disease coverage, insufficiency of clinical data, etc.
Those respondents involved in research on drug targets say that they now have to functionally validate targets themselves in order to attract downstream partners. Those involved in drug development reported that to give their products maximum marketability they must produce as much clinical data as possible in house, preferably well into phase II clinical trials. One respondent reported that his company develops to proof of concept in phase II clinical trials before looking to license- out. However, another commented that it is necessary to go even further: proof of concept was enough in the old days but now the bigger companies want toxicology to be done and completion of phase II trials. Clinical data obviously will increase the opportunity for attracting large pharma interest and it also the value attached to licences. One respondent noted that:
A lot of biotechnology companies take products into phase III then make a huge amount of money from pharma. Royalties of up to 20 percent are being
offered. This is really worthwhile as you don’t have to pay for any more development and manufacturing costs. If you are before phase III and are offered 10 percent you feel like you are being ripped off. Probably in the end you can get around 15 percent and aim for a large up-front fee. If you get to phase III you are looking at earning AU$20-30 million up front. The up- front fee is a very important component of the deal. You don’t get this if you licence-out too early.
On the other hand, another company respondent commented that their company had never been as far as phase III because of the expense. The involvement of large pharmaceutical companies is necessary to provide funding and resources and also to provide the knowledge base to comply with United States drug registration requirements. It would seem that even the largest Australian companies would baulk at undertaking phase III trials because of their enormous expense.
There is considerable risk to small companies in investing in clinical trials. If a particular product cannot ultimately be on-sold or licensed the investment in it might be lost. One respondent commented that the odds of a product making it to market are pretty awful, probably around 20:1. It takes a number of products for one to make it through to the end. Hence, the odds are very much stacked against one- product companies. As one respondent put it:
Start up companies generally rise and fall by a single product. There is not a great deal of success. All tend to float a little early. They often have a drug that is very active in vitro but to make it into a product is very difficult. They don’t factor in costs and run out of money. They also have problems with patents. They need to create a picket fence around their technology with a range of patents: formulations etc. They must have this to get deals with international companies.
Even when industry participants are looking for partners other than large pharmaceutical companies, they still tend to favour international players, particularly United States companies. For example, one respondent from an upstream biotechnology company commented that their company tends to license-out to small United States biotechnology companies engaged in drug screening. Another respondent noted:
For licensing-out our main market is the US. I have just taken my 5th trip in 7 months. I have been talking to biotechs, gene therapy companies and pharmas, across most of the biotechnology industry. Our profile is slowly increasing. We mainly do strategic alliances and freedom to operate agreements. The terms are variable. There are six different market segments. One of them is retail – supply of reagents to biotechs. These agreements tend to be exclusive. Drug companies using our technology in house go for non- exclusive arrangements. Companies doing research on gene therapies for cancer go for exclusive licences based on disease gene targets.
However, one of the big problems identified for Australian companies is lack of the ruthlessness that many of their international counterparts have developed. Hence they tend to cave in too easily when negotiations become difficult. In part this may be because they don’t appreciate the value of what they are acquiring and giving.
In some circumstances organisations may enter into horizontal licensing arrangements with competitors. For example, one respondent commented that:
In relation to one of our areas of research, we have a number of competitors with products on the market. Part of our licensing strategy is to approach them. They tend to look at known targets whereas we are looking at a mutation we have discovered. This market is significant.
However, this mechanism for earning licensing income would appear to be the exception rather than the norm.