By Jennifer Van Brunt and Robert Yu

Technology transfer lies at the very heart of drug development: From university to biotech company to pharmaceutical powerhouse, an enticing scientific discovery is gradually transformed into a new medicine – perhaps a blockbuster. In many cases, it takes all three organizations to accomplish this feat – and they do it through a series of licensing deals. When properly crafted, licensing and sublicensing contracts can maximize the profits that a university receives from its intellectual property. We'll examine the terms of a licensing deal between Stanford University and Rigel Pharmaceuticals – and how Rigel parlayed that in-licensed IP into not one, but two big pharma partnerships. We'll also take a look at the value chain for several marketed pharmaceuticals to explore the actual profit-sharing enjoyed by the university that first patented the invention that led to an approved drug.

Licensing deals make the world go around – at least for biotech and big pharma companies. Without them, few promising therapeutics would make the transition from the lab bench to the patient. While biotech firms shine in their abilities to discover new drug targets and create putative large- or small-molecule compounds to interact with these targets, it's the pharmaceutical powerhouses that excel in shepherding drug candidates through advanced clinical trials and regulatory approval. By joining forces, the two parties complement each other's needs.

But there's a third party to many drug-development efforts: Academic centers (including non-profit research organizations and teaching hospitals) are often the ultimate source of the groundbreaking scientific discoveries and cutting-edge technologies that eventually lead to new classes of medicines. By licensing their fledgling inventions to biotech companies, universities take the first, critical step on the long path of drug development.

By doing so, they assure that these inventions will at least stand a chance of being commercialized – a primary goal of the Bayh-Dole Act of 1980, which encouraged universities and non-profit research institutions to patent their inventions resulting from federally funded research and to license the intellectual property (IP) to commercial concerns for development.

Before Bayh-Dole, only a few institutions had established tech transfer programs, but by now even the smallest colleges and universities have gotten into the game, as documented by the annual surveys conducted by the Association of University Technology Managers (AUTM). And they all stand to gain from this activity – for the various fees and payments received under tech transfer agreements can add substantial amounts of cash to the university's coffers.

Sweet spot
For instance, in its FY 2002 survey (the latest available), AUTM found that academic institutions executed 4,673 new licenses and options in fiscal year 2002, up 15 percent from the previous year. Counting agreements initiated in previous years, AUTM's survey determined that more than 26,000 licenses and options were active in 2002. These active licenses generated nearly $1.3 billion in licensing income for reporting institutions in 2002 – thus representing a significant source of income whether or not the IP covered by a particular license actually results in a marketed product.

But when that occurs, the university stands to gain even more through running royalties paid by the licensee. In 2002, AUTM found, 22.4 percent of the active licenses and options generated running royalties – which amounted to slightly more than $1 billion in revenue for the institutions involved.

That's a nice chunk of change – and an active and well-managed tech transfer office will ensure that it does, indeed, receive a percentage of product sales by its licensee. But what if that licensee, a biotech company in this case, doesn't sell the product directly, but instead chooses to sublicense the IP rights to a big pharma partner? Here, too, the university stands to gain if it immediately negotiates its rights, both pre- and post-commercial, under any sublicensing agreement that may occur in the future. Unfortunately, many universities have yet to take full advantage of the situation – and thus cheat themselves out of a larger piece of the product's ultimate value.

Slicing the pie
There are nearly 2,700 university/biotech licensing deals in Recombinant Capital's alliances database: We picked 265 of those – therapeutic-based contracts that were publicly filed by the biotech company and also contained all the economic terms – for further analysis.

Typically, university/biotech licensing terms encompass one or more of the following pre-commercial payments from the biotech to the university: Upfront licensing fee, research payments, license maintenance fees, clinical milestone payments (a relatively recent addition) and sublicense revenue-sharing (in which the biotech kicks back a portion of the payments it receives from its big pharma partner). Post-commercial payments almost always include royalties (an average of 4% on $100 million in annual sales) but can also include a minimum annual royalty and sublicense revenue sharing.

Not all contracts include all terms: For instance, only one-fifth of all licenses include license maintenance fees, and milestone payments are even rarer. But universities that do require these sorts of payments are able to more fully share in the development of the out-licensed technology.

We found that about 60% of the deals mentioned above included university technology that was subsequently sublicensed; of the sublicenses, 70% included some or all of the economic terms and about 23% contained the full terms of the downstream commercial alliance. This amounted to 36 matched deals, for which we had the complete terms for both the upstream, university/biotech alliance and the downstream, biotech/pharma alliance.

Thus, we were able to analyze just exactly how value is created and shared in these alliances. In brief, we found that the pharmaceutical partner garnered about two-thirds of a commercialized product's value, and the remaining one-third was split between the biotech firm and the university on an 80:20 basis. (It is beyond the scope of this article to provide detailed analyses of the data, which can be found in the article, "Value Creation And Sharing Among Universities, Biotechnology And Pharma" that appeared in the June 2003 issue of Nature Biotechnology).

However, when we separated out those matched deals in which the university-biotech license requires that the biotech company disclose the complete financial details of a sublicense agreement to its university licensor, we found that universities shared more of the pre-launch payments due the biotech by its downstream partner (18% vs 4.8%; the yellow slice of the pie, above) but a slightly smaller royalty (26% vs 29%; the green slice) than if the sublicensing deal had not been part of the equation.

Thus, university tech transfer officers who are diligent about the terms of their out-licensing agreements – and make sure to include sublicensing terms – will maximize the economic benefits that accrue to the university on its inventions.

Of course, for early-stage platform technologies, it may be virtually impossible to actually define the eventual use to which that technology will be put. So crafting a meaningful compulsory sublicensing clause into a university-biotech contract is difficult, at best. According to Lita Nelsen, the director of MIT's technology licensing office, "we try to think ahead as far as we can, but we don't have a crystal ball." Even so, it's imperative to set the terms early, because that IP becomes a critical bargaining chip once the biotech company starts raising money from investors or gets ready to sign on a downstream pharma partner.

Its all in the details
So what should an early-stage contract between a university and a biotech firm look like? To answer that question, we examined the licensing agreement between Stanford University and Rigel Pharmaceuticals Inc. (one among many biotech-university deals that are contained in ReCap's alliances database).

Under this deal, signed in October 1996, Rigel got an exclusive license to a patent (and know-how) covering methods for screening for transdominant effector peptides and RNA molecules – and their use in the field of gene transfer technologies, including retrovirally mediated nucleic acid libraries, for drug development, drug delivery, drug screening and target analysis and discovery associated with the development, manufacture, use and sale of licensed products. Importantly, Rigel also received the right to sublicense the technology in the licensed field of use; any and all sublicenses must provide for the transfer of all obligations – including the payment of royalties – to Stanford if the agreement between Rigel and the university is terminated.

For the rights to Stanford's technology, Rigel agreed to pay the university a licensing fee of $20,000 and minimum royalties of $10,000 for each of the first two years, $20,000 per year for years three through seven and $40,000 for each year thereafter. (The license term is 20 years altogether or 10 years from the date of the first commercial sale of a licensed product by either Rigel or its sublicensee.)

If Rigel grants a sublicense to a third party for research purposes only, then Stanford receives a milestone payment equal to 1% of any research milestone payment that Rigel gets from the sublicensee. If Rigel grants one or more commercialization sublicenses to third parties, however, Stanford receives a $10,000 fee for the first sublicense, $20,000 for the second and $30,000 for each additional sublicense. As well, Rigel pays Stanford earned royalties equal to 0.5% of net sales of licensed products. To top it off, Rigel issued 40,000 shares of preferred stock to Stanford, giving the university a small stake in the company's future.

At the core
The Stanford IP is key to Rigel's core retroviral and pathway mapping technologies, which allow the firm to identify and validate new protein targets and establish a map of the intracellular proteins that define a specific signaling pathway controlling cellular responses. By mapping complex biological processes, Rigel is able to identify proteins that are demonstrated to have an important role in a disease pathway, increasing the chances of finding new, functionally validated targets for drug discovery.

Functionally validated targets are in great demand, of course, and it didn't take Rigel long to line up a series of high-profile partnerships with some of the most powerful pharmaceutical houses around – including Pfizer, Inc. and Novartis Pharma AG. In both cases, Stanford's IP was an integral part of the deal.

First, Rigel parlayed its technology into a target screening and compound discovery-based alliance with Pfizer. Signed in January 1999, the collaboration focused on identifying new drug targets in allergy and asthma – in particular, intracellular targets that prevent B cells from producing IgE (synthesis of which is controlled by the IL-4 signaling pathway).

As part of the deal, valued at about $20 million, Pfizer received the worldwide rights to small molecule drugs against these targets while Rigel received royalties ranging from 2% to 4% on human and 1% to 3% on animal therapeutics resulting from the collaboration. Of those royalties, Rigel will owe Stanford 0.5%. As well, Stanford received $10,000 as a sublicensing fee.

Pfizer extended this collaboration in January 2001 for an additional year, but by mid-2002, Rigel had been able to deliver seven validated drug targets to Pfizer, thereby completing the discovery phase of the work. Going forward, Rigel will get milestone payments for any targets that enter preclinical R&D at Pfizer.

Multi-layered deal
Soon after the Pfizer deal, Rigel's target-validating technology attracted another big pharma partner. In May 1999, it inked a broad collaboration with Novartis that spans five years and up to five individual research projects. The first of these focused on identifying targets that regulate T cells, in particular those that play a role in transplant rejection. The other projects were to be defined within a two-year period – and they eventually included programs on small molecule drug targets that mediate specific functions of B cells (for treating autoimmune diseases); targets that regulate lung epithelial function (for treating severe respiratory diseases such as asthma and chronic obstructive pulmonary disease); and small molecules that inhibit angiogenesis (for treating cancer). The research phases of the first two projects – in transplant rejection and autoimmunity – were completed in late 2002 and early 2003, respectively.

The Novartis alliance is worth about $100 million in guaranteed funding to Rigel – including upfront cash, an equity investment, research funding and milestones, as well as a 4% to 8% royalty on the sale of drugs developed by Novartis directly from a Rigel-supplied compound.

Per Rigel's upstream agreement with Stanford, the university received a $20,000 payment on the execution of the second sublicense to its technology and, of course, is set to get 0.5% of Rigel's royalties on any marketed products. However, Rigel won't be out of pocket on this one, because Novartis has agreed to pay to Rigel all royalties due to Stanford. What a sweet deal.

Rigel's research collaborations with Pfizer and Novartis are still in a fairly early stage, though, so it will be quite some time before we know if either yields even one marketed product. Thus, we can't predict the actual amounts of cash that Stanford might receive as a result of the sublicensing activities of its licensee.

But we can get an idea of what might come about by analyzing the data for marketed products that involve both upstream and downstream licenses.

The finishing touch
Take QLT Inc.'s photodynamic therapy Visudyne, for instance, which originated in research labs at the University of British Columbia. Back in January 1988, QLT licensed the rights to ophthalmic uses of porphyrin derivatives (including the compound that would become Visudyne) from the university in exchange for a $5,000 minimum annual royalty payment and a 2% royalty on gross revenue.

Six years later, QLT had advanced a lead molecule into preclinical development – at which point it signed an agreement with Ciba Vision Ophthalmics (now Novartis) for the worldwide development and commercialization of photodynamic therapy for treating eye diseases – first and foremost, age-related macular degeneration (AMD). Among other terms of the agreement, the parties agreed to split profits from product sales evenly.

To make a long story short, the FDA approved Visudyne for treating predominantly classic wet AMD in April 2000. The product gained rapid acceptance in the marketplace: In 2001, its first full year on the market, Visudyne sales reached $224 million. In 2002, sales climbed to $287 million; and in 2003, they reached $357 million.

This is good news for the University of British Columbia, too, which gets 2% of the gross revenue – or about $4.5M in 2001, $5.7 million in 2002 and $7.1 million in 2003.

The leukemia drug Campath has also generated income for the parties involved in its development – including British Technology Group plc (BTG) – one of the many players involved in Campath's development. The product, a humanized monoclonal antibody that the FDA approved in May 2001 for treating B-cell chronic lymphocytic leukemia, got its start in Herman Waldmann's labs at the University of Cambridge (he subsequently moved to the University of Oxford) – then passed through the hands of Burroughs Wellcome plc, BTG, LeukoSite Inc., Ilex Oncology Inc., Schering AG, and Millennium Pharmaceuticals Inc. (For details of Campath's early history, see the Signals article, "Campath's Path To Stardom.")

It's a complicated story (and you can follow the various deals through the recap website) but suffice it to say that, thanks to its September 1996 licensing deal on Campath with LeukoSite, BTG stood to get 5% of the product's net selling price. In 2002, Campath's first full year on the market, that amounted to $2.2 million on sales of $44 million; in 2003, BTG's take rose to $3.6 million on Campath sales of $72 million.

Sometimes, of course, the biotech company that licenses university technology decides to develop and market the product itself, without the help of a pharma partner. Here, too, we have an example that demonstrates how the university profits from the commercialization of its invention.

In September 1991, Gilead Sciences Inc. licensed the therapeutic rights to various purine and pyrimidine compounds – including lead molecules adefovir and tenofovir -- from the Institute of Organic Chemistry and Biochemistry (IOCB) in Prague, Czech Republic and Rega Stichung, of Leuven, Belgium. The institutes received an upfront payment, annual research fees, minimum annual royalties and royalties on net sales.

In little more than a decade, Gilead had developed both molecules into marketed drugs: Tenofovir won FDA marketing approval in October 2001 as the AIDS drug Viread; adefovir garnered the agency's blessing in September 2002 as the hepatitis B virus medication Hepsera.

The academic institutions have fared extremely well in the process: They receive 3% of Viread's sales, which amounted to $6.8 million on sales of $226 million in 2002 and $17 million on sales of $567 million in 2003. They also get 3% of Hepsera's sales – or $1.5 million on sales of $50 million in 2003, Hepsera's first full year on the market.

The perfect recipe
Thus, universities and research institutions can generate significant income through their licensing agreements with biotech companies. Depending on how they craft the terms of these deals, they will receive upfront fees, annual maintenance fees and royalties -- and perhaps even research and clinical milestone payments. If the university includes a sublicensing clause in the original contract, it will also receive about 20% of the product payments that its biotech licensee gets from the sublicense (the biotech's big pharma partner). In fact, sublicense revenue-sharing can be a significant source of incremental revenue to the university, especially in the period prior to product launch.

Despite all that, however, the university will still realize the largest economic returns from royalties on the sales of highly successful products – as will the biotech company and its pharmaceutical partner, which together were able to turn an exciting research result into an important new medicine.

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