A millstone decision for milestone R&D payments

The Court of Appeal dismissed Astex’s appeal concerning the interpretation of a research collaboration agreement. The outcome of this case highlights the problems of lengthy and complex agreements, leading to a lack of clarity, caused by use of differing terms and not considering future events sufficiently.

Background to the dispute

In the modern era of pharmaceutical research, it is increasingly common for large pharmaceutical companies and smaller biotech or start-up companies to collaborate on developing new drug targets and candidate molecules.  The larger players are often keen to access niche technologies and expertise and to share the development risk with a partner, which would otherwise be borne in-house.  On the other hand, smaller biotech and start-up companies are keen to access the platform screening technologies and facilities of a larger and more resourceful partner in order to progress their early stage projects.

So be it with Astex and AstraZeneca, who had for some time both engaged independently in research into novel compounds to treat Alzheimer’s disease before agreeing to collaborate.  Astex (since acquired by Otsuka), had already developed relevant crystal structures for beta-site amyloid precursor protein cleaving enzyme (BACE), an enzyme implicated in the development of the disease.  These crystal structures and associated screening techniques were of interest to AstraZeneca in order to be able to conduct hit and lead optimisation studies and to understand the structure-function relationship of its BACE hit compounds under development.

Their dispute concerned the interpretation of a lengthy research collaboration agreement (running to 67 pages) entered into for the development and optimisation of BACE inhibitors.

Definitions that weren’t so definite

In 2003 the parties entered into a complex research agreement which defined “the Project” as AstraZeneca’s pre-existing work and “the Program” as the collaborative work under the Agreement: these concepts were central to the disputes on appeal and to whether work under the Project (as AstraZeneca contended) or Program (as Astex contended) had resulted in the development of the compounds which led to the milestone payments.

Under the complex terms of the Agreement, Astex was responsible for aspects of the compound optimisation work, which included using its crystal structures and other technology to progress “Affinity Hits” (AFFITS), and AFFIT, Hit and Lead Optimisation.  There was a lack of clarity concerning some of these defined terms for the collaboration compounds, with several terms being used interchangeably in different parts of the Agreement.  The Agreement also had no fixed duration: the “Collaboration Term” being defined as continuing for as long as Astex performed its research activities under the Agreement.

The parties collaborated under the Agreement from February 2003 until April 2005; thereafter AstraZeneca continued work under the Project on its own.  Two compounds, referred to as CD1 and CD2, were later developed and nominated by AstraZeneca as “Candidate Drugs” under the Agreement.  Candidate Drugs were defined as “Collaboration Compounds” which had been identified as a direct result of lead or hit optimisation under the Program, and which satisfied AstraZeneca’s pharmacological and pharmaceutical criteria for clinical testing.  As such, the compounds would trigger milestone payments under the Agreement, and two such payments were made in relation to CD1.

Then, some ten years after collaborative work under the Agreement had come to an end, AstraZeneca informed Astex that following a review it now considered that neither CD1 nor CD2 were Collaboration Compounds within the Agreement.  Therefore, it sought to recover the milestone payments already made in respect of CD1.  CD1 had progressed to Phase I trials but was then abandoned.  The development of CD2 by AstraZeneca’s research partner Eli Lilly had reached Phase III trials, but had also been discontinued by the time the appeal was heard.

The issues to consider

At first instance the issues to be determined were summarised as follows:

• What was the duration of the Program, was it capable of expiring and could it continue after the Collaboration Term?
• How under the Agreement should it be determined whether a compound has been selected as a candidate for Hit Optimisation or Lead Optimisation? and
• Did the definition of Hit Optimisation and Lead Optimisation require a specific compound or could it be started from a series or group of compounds?

In considering how the Agreement was to be interpreted, it was common ground that AstraZeneca’s own actions to nominate CD1 and CD2 and then make the milestone payments were to be ignored: the matter is to be judged through the eyes of the reasonable person at the time the Agreement was entered into. Mr. Justice Arnold decided each issue in AstraZeneca’s favour and held that CD1 and CD2 were not compounds within the terms of the Agreement whose ongoing development and eventual sale could attract milestone and royalty payments.

It was accepted that CD1 could not be considered a Collaboration Compound discovered as a direct result of chemical structure modification performed as part of the Program.  However, Mr. Justice Arnold held that even if the Program had continued beyond the Collaboration Term, the compounds in question were not Collaboration Compounds as they had not arisen from an AFFIT or any compound optimised by Astex under the terms of the Agreement.  As such, AstraZeneca had been mistaken as to the contractual status of one of the compounds and was able to recover US$2 million by way of restitution of enrichment for the milestone payments already paid.

Astex was granted permission to appeal.

The Court of Appeal’s decision

Lord Justice Floyd, giving the leading judgment and in dismissing the appeal, agreed with Mr. Justice Arnold that the proper interpretation of the Agreement meant that the Program ended when the Collaboration Term ended.  By finding this issue in AstraZeneca’s favour, it was not necessary to address the other issues raised on the appeal.

In reaching this conclusion, Lord Justice Floyd discussed how it was unclear in the definition of “the Program” whether the statement that the research activities during the Collaboration Term as part of the Project “which thereafter may be continued by or on behalf of the AstraZeneca alone” referred to the Project or the Program.  Astex had contended that it was self-evident that AstraZeneca could continue with its Project after the Collaboration Term and so the wording must relate to the Program.  However, the Judge decided that as a matter of ordinary grammar the ‘which’ was referring to the immediately preceding clause, and so to the Project.  Furthermore, this was supported by the fact that as the Program was a “collaborative research program”, after the end of the Collaboration Term any continuing work by definition could not be collaborative.

Astex attempted to draw support from a clause which referred to the possibility of AstraZeneca pursuing pre-clinical research relating to the clinical development of Collaboration Compounds after the end of the Collaboration Term and proffered that pre-clinical research might include Lead Optimisation leading to a Candidate Drug.  However, Floyd LJ concluded that pre-clinical testing in this context referred to the ‘Results’, and was not aimed at the identification of compounds with properties meeting the Candidate Drug criteria.

In rejecting Astex’s arguments, Floyd LJ also concluded that the correct interpretation cannot mean that Hits and Leads arrived at many years after the Collaboration Term had ended and which lead independently to Candidate Drugs with commercial promise will trigger payments under the Agreement.

Comment

As with any long and complex agreement, and none more so than research collaboration agreements the devil truly is in the detail.  Certainly, the nature of drug discovery collaborations often results in lengthy and perhaps overly complex agreements where accuracy and clarity may be inadvertently compromised.

For smaller biotech or start-up companies, the milestone payments are often important for their immediate future; but it is the potential revenues to be generated from a successful clinical trial and commercialisation that will become the crucial lifeblood to keep the company alive, and to reward the faith of the investors backing the company. Yet such companies either need to restrict the legal fees/costs necessary to consider the drafts of the collaboration agreement, or simply rely on the larger party’s legal team to do the drafting. In either case, conflicts or failures to understand the implications potentially lurk. One is also left to wonder whether the legal team has been given the full picture or else fully understood the potential outcomes.

It goes without saying that terms such as the duration of the collaboration term and the obligations of the parties under the Agreement, both during the period of active collaboration and once the collaborative research efforts have come to an end, should be carefully defined: we are sure the legal teams thought they had.  Yet all too easily ‘agreement fatigue’ can set in, and just how often are companies be willing to pay for the legal team to read the agreement over and over and over again? Unfortunately, without it the difficulty is in ensuring consistency in wording and in the use of defined terms in the main agreement, any schedules or research plans, and any supplementary agreements entered into at a later date.

Although not determinative in this case on appeal, special care should also be given to the definition of compounds and their optimised derivatives as they move through each stage of the drug discovery and development process: an optimised hit or optimised lead may or may not mean the same thing to each party.  This may be of particular concern when one party, such as a start-up, is not well versed with the high-throughput screening platform technologies and associated terminology typically used by big pharma.

The cost/care conundrum is one which will continue to manifest itself in complex collaborations, particularly if there is inexperience on one side, or financial pressures on the other. Having a researcher (former or current) as part of the legal team from the beginning, can only help in gaining a better understanding of what the desired outcomes are to be, when that is likely to occur, reducing the risks of incompatible terms, or failing to appreciate just how long the operative parts need to continue. In the end, a company will always get what it pays for, or not, if it does not.

The full decision from the Court of Appeal can be read here.