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Value of FTO in biopharma investment, financing

The biopharmaceutical industry will see continued growth in investment and financing this year, not least fuelled by continuing global demand for pandemic vaccines. In the tug-of-war between return and risk, both experienced investment giants and emerging capital players invariably cast their sights on investment return rate and risk control.

In particular, due diligence becomes an important means of investment risk control, and freedom to operate (FTO) is the most important step of due diligence in such high-tech fields.

In essence, FTO means investigating whether there is a risk of infringing others’ patent rights when the object of due diligence operates in a specific region or country.

Some key words and trending topics for FTO investigation in the biopharmaceutical industry in 2021 include liposome, mRNA, antibody, Antibody-Drug Conjugates (ADC) and Chimeric Antigen Receptor T-Cell Immunotherapy (CAR-T) – echoing currently trending fields in the industry itself such as cell therapy, gene therapy, regenerative medicine, nucleic acid drugs and macromolecular drugs. This highlights the significance of FTO investigation as a risk deterrence in the biopharmaceutical industry.

Risk warning

Taking liposomes, the critical delivery technology for covid-19 vaccines, for example, FTO demonstrates a strong argument for risk warning.

Well-known patented technologies of liposomes are held by just a few companies. Ian MacLachlan and Thomas Madden, who worked together in liposome R&D at Inex Pharmaceuticals in Vancouver over 20 years ago, continued to develop liposomes either independently or co-operatively in companies they later served at or founded.

Consequently, patented technology of liposomes is now held by only a few companies, including Arbutus (formerly Tekmira), Acuitas, Protiva, Alnylam and Genevant. For downstream pharmaceutical companies wishing to use liposome technology but lacking the capacity for independent in-house R&D, obtaining a licence from upstream companies with patented technology seems a sound option. Moderna and Pfizer, developers of mRNA vaccines, have adopted such licences in commercial strategies.

However, these patent owners have technological overlaps due to historical reasons, have mutual licences, and also compete with one another, resulting in certain pharmaceutical companies being sued for infringement by source technology companies other than the licensor, forcing them to suspend clinical trials or fight back with patent invalidation.

According to incomplete statistics, a total of 14 patents concerning liposomal drug delivery technology have been subject to litigation or invalidation among these companies, the most recent being the patent infringement case of Alnylam v Moderna and Pfizer on 17 March 2022.

The key lesson is that while discussing licensing of a patent portfolio with source technology companies, the licensed company should first conduct an FTO search to verify whether the technology in the licensed portfolio suffers any risks of infringing patent rights of other source technology companies – and take effective measures to prevent the history of above-mentioned pharmaceutical companies from being re-enacted.

Adoption of FTO for risk warning is expected to reduce the number of patent infringement cases between upstream liposome technology companies and downstream pharmaceutical companies.

Value measurement

FTO can be very helpful in measuring the technical and commercial value. Taking CAR-T as an example, Novartis, Juno Therapeutics and Kite Pharma are currently the three giants ranked in the first echelon of this cell therapy technology.

In June 2021, Fosun Kite’s Axicabtagene Ciloleucel became the first CAR-T cell therapy drug approved in China for the second-line or subsequent treatment of lymphomas, with a proposed online procurement price of RMB1.2 million (USD181,000) per dose. In September 2021, the National Medical Products Administration (NMPA) announced that Relma-cel, a CAR-T product targeting CD19 of JW Therapeutics, was officially approved for the treatment of relapsed or refractory large B-cell lymphoma in adult patients, after second-line or subsequent systemic treatment with a proposed online procurement price of RMB1.29 million per dose.

According to the statistics of EqualOcean Intelligence, about 20 CAR-T enterprises received investment and financing successively in 2021, with announced financing exceeding RMB7 billion.

In these investment and financing transactions, FTO has provided in-depth technical support for the value evaluation of CAR-T cell therapy and its commercial valuation. Given the complexity and diversity of CAR-T elements, coupled with heated competition, it is inevitable that new competitors refer to prior technologies. In addition, new structural elements are constantly introduced into the construction of CAR-T, and a high degree of target overlap and repeated reference of elements have become commonplace.

In FTO investigations, infringements of another’s prior patent rights are often found. Investors will evaluate the commercial and technical value of investment projects based on the level of infringement risk, and the difficulty of resolving the risk by means of patent invalidation, licensing or assignment.

Therefore, FTO will, to some extent, assist investors in bargaining for investment projects, such as adding conditions to the delivery terms or adjusting the allocation amount in the milestone payment.

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