Early-Stage Life Sciences Partnerships Raise Later-Stage Considerations

At-A-Glance

Emerging biotechs and their investors are exploring partnerships with drug companies at a much earlier stage in the company lifecycle, motivated by finding stability in an otherwise volatile and uncertain climate.  Our cross-disciplinary team offers considerations for development-stage companies to support a successful major partnership with a pharma company in the following areas.

     •  Structural Considerations
     •  IP
     •  Development and Commercialization
     •  Regulatory

Early-stage companies thrive on being nimble and running rather than walking. In times when funding is flowing and the initial public offering market is open, entering into a long-term, highly structured arrangement with a large, established company may be one of several options available. But as many emerging biotech companies are realizing today, this type of partnership can provide a means not only to survive in turbulent or less certain environments but also to thrive.

From an investment standpoint, such partnerships reduce technical and execution risk by bringing experienced development teams, regulatory insight, and operational infrastructure to an emerging company. They also introduce valuable nondilutive capital through the use of upfront payments or milestone-based funding, enabling the company to conserve equity and extend its financial runway. Not surprisingly, though, these collaborations may require a new level of discipline for the early-stage partner. Steering committees, documentation and reporting requirements, and mutually agreed-on project plans are just a few of the formalities that frequently apply to such partnerships.

As a result, to assist development-stage companies and their investors when weighing the highly attractive stability, long-term support, and scientific validation offered by these partnerships against the obligations and structure that are equally important in a partnership, we offer the following list of later-stage legal and regulatory issues that potential partners should consider.

Structural Considerations

Venture investors particularly value the capital efficiency gained through these partnerships, as it allows an emerging biotech company to focus equity financing on long-term value creation rather than short-term survival. Additionally, the presence of a large pharmaceutical partner may increase the likelihood of a strategic exit, positioning the partner as a potential acquirer down the road or drawing interest from others in a competitive process. These dynamics can materially enhance the valuation trajectory and return potential.

At the same time, sophisticated investors will closely examine the structure of any partnership to ensure it does not constrain the company’s strategic flexibility or unduly limit upside potential. For platform companies in particular, venture capital firms seek deal structures that preserve optionality across multiple programs and indications. A narrowly focused or overly burdensome alliance may undermine this broader value proposition. Key areas of concern include the scope of exclusivity, intellectual property (IP) access, rights of first refusal for future transactions, and control over clinical, regulatory, and commercial decision-making. Overly restrictive terms may impair future financing, limit follow-on dealmaking, or reduce optionality in exit scenarios.

IP

Ownership and access to newly created IP is often a core value driver and complex negotiation point in collaborations. But when the compound at the center of the collaboration is in a very early stage of development, the high-value applications and associated IP may not be as clear. It is crucial to think both practically and with long-term implications in mind when structuring IP terms. Key questions to consider:

• Should newly generated IP be owned based on inventorship, subject matter, jointly, or by some other allocation? Each would have its own operational and business realities that should be recognized.
• Which party should control prosecution of patentable inventions arising from the collaboration? Keep in mind that both parties may also have business interests outside of the collaboration that could influence patent strategy.
• Which party should control enforcement of the collaboration IP? Litigation can have profound effects on the value of particular IP, both positively and negatively.
• Are rights to a party’s IP that exist outside of the collaboration (i.e., background IP) needed to realize the full value of the collaboration? What if that IP is also used in other areas of the party’s business?
• What happens to license grants, particularly those that are exclusive, if there is a setback or change in commercial interests? Terms about the potential reversion of IP licenses can be just as important as the licenses themselves.

Development and Commercialization

Key decisions will have to be made around development and commercialization contributions as well as information sharing, including with respect to the following:

• whether clinical study site results will be shared on a rolling basis with the pharma partner and the executive leaders of the development-stage company
• whether the pharma partner will have the right to provide input in investigator recruitment and patient enrollment methods
• whether the reimbursement model is sound and durable given the potential for changes in drug pricing policy such as further changes to the Inflation Reduction Act and a relaunch of most-favored-nations pricing
• to what extent the pharma partner will be able to place the early-stage partner’s product on its market access contracts
• whether both parties or only one will promote the product
• which party will book the sales
• whether any ex-U.S. licenses with other parties may exist as this could have implications for most-favored-nations pricing should such policy proposals go into effect in the U.S.

Regulatory

The regulatory strategy for a therapeutic requires a long-term view, and a collaboration at a preclinical or early clinical stage of an asset can present challenges in this regard. Thoughtful consideration of the following can help avoid future issues.

• Milestones: Contingency payments based on key clinical trial and approval milestones are often critical for addressing the uncertainty inherent in biotech development. But disputes about whether milestones are met can easily arise, especially if milestone language is not carefully tailored to the applicable scientific and regulatory considerations. As just one example, regulatory approval for a certain indication is a common milestone, but does that mean any approval in that indication or only one that has significant commercial importance? And what if agency expectations for approval change? As one can see, to satisfy the milestone goals for the partnership, it is critical for early-stage companies to map out these considerations internally and account for them in clear milestone language.
• Setbacks: Steering committee meetings can include discussions of setbacks, such as difficulties obtaining alignment with regulatory authorities, higher-than-anticipated costs of running trials, and shifting market dynamics that may influence decisions about product promotion and marketing. Early and open dialogue can provide opportunities for the development-stage company to seek guidance and support from the pharma partner, which may have confronted such challenges in its own business or in other partnerships.
• Paving the way: The journey for a development-stage company often involves multiple partnerships (for new compounds, new indications, or target discovery using AI/machine learning as just a few examples), and each one has the possibility of putting the company in a better position for future dealmaking. For example, more-experienced partners may provide good insight into what potential future partners would expect to see in terms of regulatory strategy, product development decisions, interactions with regulators, and plans for developing data to support postapproval marketing. A well-executed regulatory plan can not only pay dividends in the partnership in hand but can lay the groundwork for more lucrative partnerships and success in navigating any diligence that may be part of future dealmaking.

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Concluding Thoughts

Collaborations can be transformative for a company, and negotiating these agreements to ensure alignment with investor expectations and to protect long-term value is critical. When thoughtfully structured, early partnering transactions can significantly enhance investor confidence, accelerate development timelines, and position both partners for success. Careful consideration of the issues described here is a critical step in maximizing the likelihood of realizing all that potential.