Key issues in companion diagnostics partnering deals

This article is part of our Biotech Review of the Year - Issue 12 publication.

It is now over a quarter of a century since the first companion diagnostic (CDx) was launched. The landmark moment was in September 1998, when the US Food and Drug Administration (FDA) granted simultaneous approvals for the well-known targeted cancer drug, Herceptin®, and its accompanying CDx, HercepTest® (a HER2 immunohistochemical assay). Since then, CDx approvals have been rising year on year, with the CDx market now expected to grow exponentially from around $7.66 billion in 2023 to $21.15 billion in 2032.¹

In short, a CDx is an in vitro diagnostic test or assay that helps ensure the safe and/or effective use of a specific medicinal product. Healthcare providers use them to help determine whether a particular treatment will be effective for an individual patient, to identify those patients who could be at high risk of side effects, and to monitor treatment responses for the purpose of adjusting their dosage or dosing regimen. 

CDxs play a key role in the growing trend towards precision medicine. Essentially, they are designed to assist in finding “the right drug for the right patient”, based on the genetic makeup, biomarker expression or other specific characteristics of the patient in question. 

The dynamics of CDx collaborations 

Collaborations between biopharmaceutical companies and diagnostic companies are becoming more prevalent and a more regular feature of a biotech company’s strategy.

Given the need for specific industry experience, appropriate quality management systems and infrastructure required to successfully commercialise a diagnostic, it still remains somewhat unusual for a biopharma company to develop, or in-license, diagnostic technology and commercialise this technology itself. Therefore, typically the biopharma and diagnostic company will enter into a collaboration agreement (or, sometimes, a series of agreements) under which the diagnostic is developed or optimised and then subsequently commercialised by the diagnostic company. This is naturally a different dynamic to a typical biotech licensing deal (whereby one party simply takes the right to commercialise a product itself) and, despite some obvious shared common interests, each party has diverging commercial drivers and challenges to navigate. 

The focus of this article is to outline some of the key themes and topics arising in collaboration arrangements of this nature, with a particular emphasis on CDxs (although some of the points hold true for other diagnostics). 

Does exclusivity matter?

In most typical biotech deals, exclusivity is the holy grail. However, somewhat incongruously, exclusivity around the diagnostic is not necessarily needed, or indeed ultimately may not be beneficial, for the biopharma company. Exclusivity will always need to be considered on a deal-by-deal basis, and some form of time-limited exclusivity, in order to give the biopharma company a first-mover advantage, may be appropriate in individual circumstances. That being said, from the biopharma’s perspective, allowing the diagnostic company to use the test for other companies’ therapeutic products should lead to wider use of the test which, in turn, can often lead to increased patient take-up for the first biopharma company’s medicine. This wider use case will normally make the diagnostic more commercially viable for the diagnostic company – ultimately, increasing the incentive for, and thus likelihood of, the diagnostic being kept on the market (more on which later). 

Financial considerations 

Naturally, each party has different commercial drivers in a collaboration of this nature. The biotech company is focused on the use of the diagnostic as a pre-requisite for, or to increase, sales of its medicinal product. However, the diagnostic partner is driven not only by the income that may be derived from providing services to a biotech company to develop the diagnostic, but also from the sales of the test itself. 

Typically a diagnostic partner will want to structure the deal in a way that it receives sufficient income for the development work (eg in the form of upfront technology access fees, lump-sum payments for developmental milestones, etc) to cover the risks/costs of sunken development time if the collaboration is not successful. Revenue streams and margins for the diagnostic company are often greater in respect of the actual commercialisation of the test (as opposed to the income earned during the development phase). Therefore, the financial package needs to ensure that it remains commercially viable, and indeed advantageous to both parties, to keep the test on the market. 

As a result of these financial considerations, some diagnostic partners may seek to charge break fees if the collaboration is terminated early, albeit these are often strongly resisted by their biotech and pharma counterparts. From a biotech’s perspective, if break fees are to be conceded, these are likely to be limited to early termination situations which are under the biotech’s control (eg for the biotech’s convenience or material breach, as opposed to technical/scientific failures related to the medicinal product). 

Intellectual property issues

Collaborations of this nature are inherently IP-rich and, as ever, the ownership regime is often hotly negotiated. The diagnostic company will own its platform technology and proprietary methodologies (amongst other things) to help develop the diagnostic, and usually any general improvements made to these. The biotech company will bring other IP, know-how and materials to the table, including valuable biological samples and clinical data from its own studies, which will be key in developing or optimising the test. The ideal position for a biotech company is that it owns all of the IP, data and insights generated from its own samples and clinical data. However, it is not unusual for some larger diagnostic partners to seek to jointly-own certain subsets of this data (for example, biomarker data or data which is useful in patient selection/stratification or prognosis). In those situations where joint-ownership of this nature is agreed, each party typically obtains the exclusive right to exploit such data in their respective fields (in other words, drug field for the biotech company, and diagnostic field for the diagnostic partner). 

Regardless of the terms that are agreed for the ownership of newly-arising IP, each party will want to ensure that it has sufficient freedom-to-operate licences from the other party so that it can commercialise its medicine (in the case of the biotech company) or the CDx (in the case of the diagnostic company). The devil is often in the detail when it comes to these licensing terms. Each party will want to keep tight controls on the extent to which any such licenses potentially could be used for the benefit of its competitors – bearing in mind, for example, that there will often be a desire on both sides to repurpose a CDx for use with other therapeutic products.

Commercialising the CDx

Both parties are taking a risk in a collaboration of this nature. However, ultimately the greater risk often lies with the biotech company, particularly for CDxs where the sales of the medicinal product are intrinsically linked to the availability of the CDx. 

In an attempt to mitigate this risk, biotech companies will need to seek strong contractual assurances from the diagnostic partner to seek the necessary regulatory approvals or conformity markings for, and commercialise, the diagnostic. 

In a traditional biotech licensing deal, the licensor would simply take (or threaten to take) the licence away if the product is not being suitably commercialised by the commercialising party. However, of course, this is not the case in this situation. Therefore, the biotech company will need to include robust obligations on the diagnostic partner to keep commercialising the test in the medicinal product’s major markets - for example, by agreeing to follow detailed commercialisation plans and possibly also to meet key performance indicators (KPIs) (although it can often be somewhat challenging to define, and agree upon, suitable KPIs in practice). As well as the scope of the commercialisation obligations to be imposed on the diagnostic partner, it is also crucial to clearly define the duration for which the diagnostic partner is required to commercialise. For a CDx, a biotech company will want this period to be for so long as it is commercialising the related medicinal product in the relevant market. 

What if things don’t go to plan? 

Given the risks involved but also bearing in mind the differing commercial drivers/benefits, trying to reach a mutually-agreeable liability regime for an arrangement of this nature can be particularly challenging. From a biotech company’s perspective, the stakes can be extremely high if a CDx is not effectively commercialised (as its losses in respect of sales of its own medicinal products could be enormous). However, understandably, a diagnostic company who is only receiving a small “slice of that pie” will be unwilling to expose itself to full liability for that type of loss. Therefore, the parties will need to reach a meaningful but not disproportionate figure. In some cases we have seen liability caps being split in respect of the two main stages of the collaboration, namely the initial development stage and then the commercialisation stage, where, given the increasing importance/value, a higher cap is applied to the commercialisation activities. 

Of course, from a biotech’s perspective, howsoever crafted, a damages claim for failure by the diagnostic partner to commercialise the test is unlikely to ever provide an adequate remedy for its loss of medicinal product sales. Therefore, any well-advised biotech should think about other alternative remedies (without jeopardising its ability to claim damages) if the CDx is not developed or commercialised as it had envisaged. A well-crafted alternative remedy clause of this nature would fundamentally impose an obligation on the parties to seek to come to another arrangement to ensure the ongoing development and/or commercialisation of the diagnostic. An example of this is appointing third parties to make the diagnostic available through alternative channels. Requesting a technology transfer of the diagnostic technology might initially sound like an attractive option for a biotech company, but this will be heavily resisted by the diagnostic partner. In any event, it is unlikely to provide much comfort given the practical difficulties and time involved in implementing such a solution. Ultimately, the developer of the medicine may decide to move to another diagnostic provider with their own rival technology, who may need to carry out a bridging study to validate an alternative CDx, by establishing its equivalence to the original. In such cases, it will be crucial that the original diagnostic partner shares sufficient data with the biotech company to enable this to happen.

As it is almost impossible to predict at the outset the appropriate solution for a future issue, regrettably there is unlikely to ever be an easy answer and a clause of this nature will always have inherent limitations. It will, in most cases, only ever be able to set out parameters for agreeing possible solutions in the future, rather than definitively providing the biotech company with an agreed remedy. Nevertheless, from a biotech’s perspective, the intention of this clause is to hold the diagnostic partner’s “feet to the fire” and to ensure the parties are brought to the table as soon as possible to seek to mitigate the risk of product challenges/failure. This serves as a helpful reminder to try and select the right diagnostics partner in the first place, based not only on the performance of their technology, but also their track record, experience, market penetration, and so on.

The future of CDx partnerships 

With an ever increasing number of targeted therapeutics coming through the pipeline and gaining regulatory approval, and the important role that CDxs play in their route to market, we can expect the number of CDx collaboration projects to keep on rising. 

Although oncology is likely to remain the main focus of CDx development, work in other fields (such as rare diseases) is gaining traction. Moreover, with new technological advances, such as AI, CDx will become more sophisticated tools. In turn, the collaborations will become more complex – for instance, with the need to build in the requirements of the EU AI Act into the development of an AI-enabled CDx from the outset. 

Choosing the right partner for these collaborations will undoubtedly remain a crucial decision. We anticipate that many industry-leading pharma and biotech companies are likely to focus on “doubling down” on their existing relationships with their key diagnostic partners, to expand and strengthen those collaborations. 

Footnotes

_{¹    Source: S&S Insider “Companion Diagnostic Market Size & Trends”}