After just giving a talk this past week on international strategic alliances, I was struck by the recent Forbes article on the increasing number of big pharmaceutical companies increasingly forming alliances with biotech firms. It seems that almost 30% of big pharma’s revenue now comes from products licensed from smaller biotech firms. This shows the powerful force that biotech has become in the world of targeted drug therapies.

But, figuring out how to make an alliance work is another matter. At least one-third of alliances between big pharma and biotechs are canceled or renegotiated, and less than 40% of alliances meet their stated objectives, according to a report by Deloitte & Touche.

Still, there does seem to be increased activity since the number of alliances last year between big pharma and biotech rose to 502, from just 69 in 1993, netting biotech companies a combined $11 billion last year. There’s also been a boomlet of about 750 biotech-biotech alliances between 2000 and 2003.

Of the 126 biotech companies with revenues less than $500 million surveyed by Deloitte, nearly three-quarters said they plan to increase the number of alliances in the next three years. For 59% of firms surveyed, alliances are part of their core strategy.

So, what makes for a successful alliance? Biotech firms surveyed described four key factors:

* Commitment from senior management
* Favorable deal terms
* Market depth in particular therapeutic areas
* Firm alignment with the partner’s core strategy

Since big pharma and biopharma are competing for alliances to make up for patent expirations and depleting pipelines, small biotechs are choosing from an average of eight candidates for each alliance deal and at earlier stages of product development.

As I always tell clients, you need to develop a patent and licensing strategy that is consistent with the company’s business plan. That is, look for a strategic partner that advances the company’s goals and not just provides licensing revenue back to the licensor or you’ll find yourself without a “next phase” in the plan. And while you always expect the best, you need to plan for the worse in case things go wrong. This includes setting up various exit strategies so you’re not tied to a bad deal.

But most of all, remain flexible. Many times, I’ve had to work with clients to re-do a deal because things did not go well, such as regulatory approval or clinical trials. I’ve had to re-negotiate the licensing terms of more than one deal where the licensee finds out the payments are more than the market can bear. Often, it is when the company goes to the next round of financing and they find that no one will invest because of the royalty rates.

Then there are the tax ramifications. In globally-competitive development, manufacture, sales, or partnership agreements, there can be some overall tax savings or deferral (or improvement to the company balance sheet) through cross-border shifting of income, risk, and/or control. But, as they say, offshore tax strategies are hard to do properly — you must establish residence for central management and control in an offshore jurisdiction.

Some of the substantial elements to establishing residence:

(a) a majority of directors are non-residents; (b) director’s meetings are held outside of current country; (c) licensing entity staffed with employees who have authority to direct operations; (d) books and records are maintained offshore; (e) all contracts are signed by offshore staff; and (f) day-to-day operations conducted by offshore staff.

And like they say, these are trained experts; don’t try this at home without adequate supervision.

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