Bloomberg Law
June 23, 2020, 8:00 AM

INSIGHT: Legal Battles Extend to Failures in Drug Development

Colin Cabral
Colin Cabral
Proskauer Rose

The untold story of pharmaceutical drug development is one of terrific failure. The FDA approves roughly two dozen drugs each year. For every drug that receives FDA approval, many hundreds do not.

A recent study estimated that the average research-and-development investment needed to bring a new medicine to market in the U.S. exceeds $1 billion.

Statutory marketing exclusivity and patent protection allow pharmaceutical companies to recoup heavy costs sunk into failed drug candidates when a new drug emerges to receive regulatory approval and become a commercial success. But the barren landscape of failed compounds and biologics left behind provides fertile ground for contentious legal battles.

Collaboration in pharmaceutical drug development is good policy—it promotes innovation and increases access to drugs that improve patient outcomes. A sound legal strategy that accounts for and neutralizes potential disputes benefits everyone involved.

Disputes Are Common After Failure

Disputes arise when an outside party obtains a financial interest in the progress or outcome of an unsuccessful drug development program. Outside stakeholders can result from acquisitions of small biotechnology companies with one or more development-stage drug candidates, or agreements to secure funding in support of a promising but costly drug program.

Most acquisition scenarios involve upfront cash consideration, together with substantial earn-out potential that allows the buyer and seller to share the risks associated with myriad problems that could arise during drug development.

Earn-outs consist of future contingent payments triggered by development milestones and regulatory approvals. The milestones are aspirational, however, and setbacks are quite common. A drug may present a safety issue in the form of a toxicity or carcinogenicity signal. Or clinical testing might reveal an issue with efficacy, meaning that the drug is not effective in humans to treat the underlying condition.

Even if the drug is safe and efficacious, anti-drug antibodies can develop over time to reduce its therapeutic benefit. These setbacks can result in significant delays, reduce the probability of success with regard to regulatory approval, or even lead to termination of the development program.

Funding agreements also include earn-out potential, which could include fixed payments for milestone events or royalties based on net sales. Outside funding can help mitigate the significant cost of late-stage clinical development in return for a share of any proceeds following regulatory approval and commercialization.

While outside investment tends to occur later in the drug development process—that is, after pre-clinical and early clinical studies have provided evidence that a drug candidate has promise, for example, by demonstrating some degree of safety and efficacy—investors are not immune from the risk of unforeseen problems that could result in the failure of the drug candidate.

Interests that were once aligned at the time of a merger or funding arrangement can diverge over time. Sellers and investors only realize their earn-out potential if a drug candidate progresses through development, which creates incentives to minimize the significance of issues that arise during drug development, and to resist or challenge any decision to terminate a development program.

By contrast, the pharmaceutical companies primarily responsible for the actual development work must account for a more complex set of considerations that extend beyond mere financial gain. Examples include the safe and ethical treatment of human patients, the allocation of resources to other priorities within a development pipeline, and the company’s reputation among key opinion leaders in the medical community.

Anticipate the Unexpected

Anticipating the unexpected during drug development is the key to avoiding legal trouble. Objective criteria for milestone provisions are ideal; ambiguity and subjectivity provide an opening for lawsuits.

For example, a milestone triggered by the first patient dosed in a Phase 3 clinical trial leaves little room for semantic debate. Reasonable minds could disagree, however, about what constitutes the “successful” completion of a study. Absent explicit guidance or specific diligence requirements, the parties are also likely to disagree about the meaning and application of contract provisions calling for “commercially reasonable efforts” during drug development.

This is particularly true when a contract is silent (or unclear) regarding whether commercial factors, such as revised revenue projections based on changing market conditions, can support a decision to terminate the drug program.

Some practical measures exist to minimize potential conflict. Sellers and investors should insist on regular reporting requirements to obtain information and insight into the status of the development program and learn about problems as they arise. A separate disclosure requirement triggered by any material event that could adversely affect the development program would provide additional transparency.

For their part, pharmaceutical companies should resist unorthodox contract provisions that invite attack from enterprising lawyers operating under contingency fee arrangements. They can also utilize feedback from independent experts, on a scientific advisory board, for example, to counter allegations that the reasons provided for termination were somehow pretextual.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Colin Cabral is a partner at Proskauer Rose in Los Angeles where he is a litigator and trial lawyer specializing in complex patent, intellectual property, and contract disputes. He has represented pharmaceutical companies in patent disputes relating to small molecule compounds and biosimilar drugs as well as contract disputes arising out of unsuccessful drug development programs.

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