Negotiating the terms of a research collaboration can be a minefield. Life sciences attorney Lori Waldron shares her extensive experience helping biotech and pharma companies negotiate agreements.
Amid a dramatic increase in funding research and development in the medical biotech sector, both larger pharmaceutical companies looking to diversify their portfolios and startups looking for a reliable larger partner are facing unique challenges and opportunities.
The devil is in the details even when it comes to vanilla research collaboration deals. Nobody wants their partner to walk away with their trademark or to put their product on the shelf and prioritize other investments instead. Lori Waldron, Co-Chair of the law firm Sills Cummis & Gross’ Life Sciences Practice Group, explains some of the fine print of such deals.
Over her decades-long career as a prominent corporate lawyer specializing in the life sciences, she has personally handled more than 200 product development, licensing, and commercialization transactions, including joint ventures and strategic collaborations as well as license, supply, clinical trial, and distribution agreements among others.
What is the most common misconception when a smaller company is negotiating with a larger firm for research and development funding?
One common misconception is that the larger company — often ‘big pharma’ — has complete leverage over the smaller company — we will call this company ‘small pharma’. This is simply not the case. Both parties have specific strengths and needs.
Small pharma typically owns the underlying product intellectual property but is faced with the problem that R&D for a pharmaceutical product is a very long and expensive process. Big pharma typically has money and resources but is challenged by a competitive product landscape, with patents expiring on some of its products. So both companies need each other.
If the transaction is designed properly, it should be a win-win for each of them. The transaction is often structured as a collaboration of some sort, with small pharma licensing its intellectual property and other product rights to big pharma.
Which contractual terms tend to be the biggest challenges?
In addition to negotiations regarding finances, two of the terms that present challenges relate to control over the product R&D and the extent of big pharma’s diligence obligation.
First, which party will have control over research and development activities? Often the parties will agree to a development plan in advance and form a joint steering committee to monitor R&D activities. However, at the end of the day, one party is going to have more control over R&D than the other and make the final decision if the parties disagree on how to progress such activities. I like to include some protective provisions here.
For instance, when representing small pharma, if big pharma is entitled to make the final decision in the event of a dispute, I make sure to include a provision to the effect that no such decision may materially increase small pharma’s financial requirements under the license agreement.
Second, what efforts must big pharma take with respect to the research, development, and commercialization of the product in order to maintain its license rights under the collaboration agreement? This is referred to as its diligence obligation. The diligence obligation could be general and require big pharma to use ‘commercially reasonable efforts’ to advance the product through its pipeline and sale process. However, the meaning of commercially reasonable efforts is not precise and the two parties could interpret the phrase, and the corresponding diligence requirement, quite differently.
Conversely, the obligation could be more specific, such as an obligation to meet certain milestones or expend a certain amount of money by specified dates. For example, the license agreement could require big pharma to complete certain clinical trials or file a particular regulatory filing by a certain date. There are many nuanced provisions that can be included, such as a right of big pharma to buy an extension to its time-based obligations or a provision stating that if big pharma spends a certain amount of money, it will satisfy a safe harbor and be automatically deemed to have met its due diligence obligation.
I note that a diligence obligation is a must-have for small pharma. Without this obligation, there is nothing to prevent the big pharma licensee from putting the potential product on the shelf in favor of expending money and resources on other products. That could be catastrophic for the small company.
Are there any traps that big companies can fall into?
Since big pharma is usually the party paying money to small pharma, let me focus on some financial traps for big pharma to avoid. I place the types of money exchanging hands into several buckets, including upfront payments, milestone payments, royalties, sublicense revenue sharing, and patent maintenance costs. Some traps include:
- Royalty stacking. In order to successfully develop and commercialize a product, big pharma will often need or desire to in-license inventions or technologies from several sources. However, multiple royalties owed to multiple licensors could be expensive and, in some cases, so cost-prohibitive that actual commercialization of the product would be difficult. Big pharma should consider this in advance and, if appropriate, include a royalty stacking provision.
This common provision allows big pharma to offset royalties paid by it to one licensor against the royalties owed to another licensor, thus reducing the aggregate royalty burden. Licensors are often willing to agree to such a provision based on the theory that the value of the end product — and resulting royalty payments — will increase as more technology is added. If this provision is included, it also would likely include a ‘royalty floor’ below which an individual royalty may not fall.
If there is a lot of competition, the licensee may also want to get a reduction in the royalty if generic competition starts eating into the market share. I would advise never to agree to a flat royalty rate and to always think through what could happen in the future and how to make sure that the royalty burden is not going to be so high as to make commercialization difficult or impossible.
- Milestone payments tied to events that do not increase value. A milestone payment may be owed by big pharma to small pharma upon achievement of certain events. Typical milestone triggers for a pharmaceutical product include identification of a lead compound, commencement of animal studies, filing of an investigational new drug (IND) application with the U.S. Food and Drug Administration — or filing of a comparable or equivalent application in a foreign country –, commencement of clinical trials and product approval.
In each case, a milestone payment should correlate directly to an event that reduces the risk and increases the value of the product or potential product. I have seen companies tie milestone payments to events that are not turning points for the product life cycle, such as completion of a particular study or test that is not invaluable to the process. In such a case, big pharma would be required to make a payment even when it is not sure that the product outlook is favorable or that it even wants to move forward with the product.
- Out of control patent costs. In some license arrangements, the licensee pays for the costs associated with patent prosecution and maintenance. In the event that big pharma must pay for these patent costs, it should ensure that it has some control over the magnitude of the costs. At a minimum, it should have the right to be involved in the decision-making process — for example, in determining in which jurisdictions to file for patent protection — and to terminate its license rights on specific patents or countries — without being required to terminate the entire collaboration agreement — if it does not want to pay for certain patent protections.
What can smaller companies do to prevent problems down the road?
Smaller companies are quite mindful of how tough it is to bring a product to market. They understand that big pharma companies are focusing on expanding their portfolios and may be entering into similar arrangements with many small pharma companies, with the understanding that only a small percentage of them will be a hit and result in a commercialized product.
With that in mind, it is important for small pharma to have a plan in place in the event that the agreement is terminated by big pharma so that small pharma does not need to start from scratch if it wants to continue to move forward with the product.
Some items to consider include which party keeps the product rights and owns the data and technology created under the collaboration? Does either party have any continuing support or tech transfer obligations to the other? Does either party have to pay money to the other? What happens to the trademark for a branded product?
The answers to these and other pertinent questions usually depend on several factors, including why the agreement was terminated — breach versus no breach — how much money each party expended, and what additional intellectual property and other assets each of the parties contributed to the collaboration.
What would you tell a scientist and is considering creating a startup with a view to landing a funding collaboration?
I will focus here on the basics. First, start with a good confidentiality agreement and be mindful of what you disclose and when you disclose it. Please specifically stamp any confidential information as confidential and proprietary.
Second, if you are working with any co-inventors, make sure that you have proper invention assignment agreements in place to ensure that the rights to any inventions are owned by your newly created entity.
Third, consider when to file for patent protection. This is often a tricky item to consider. Filing has its obvious benefits, but you will then be starting the clock on the limited patent life.
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