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Top Ten Questions about Biotech Strategic Alliances

Bill Wofford, Partner, Hutchison Law Group PLLC

In the biotech industry, companies are defined by the strength of their intellectual property, the promise of their products and the quality of their partnerships. When a company controls a promising product protected by strong intellectual property (IP), it is in a great position to complete a lucrative license or broader strategic alliance to bring the product to market. When a company is ready to pursue a strategic alliance, many questions will arise. A few questions to ask your legal advisors follow.

One: Should We Have a Detailed Term Sheet?

Yes. Drug development and marketing collaborations are complex transactions. Ensuring a common understanding of key aspects of the transaction early helps prevent having the deal falling apart at a later, more costly stage. Also, a template term sheet with the preferred transaction structure can be used to solicit competitive bids from potential partners. Although a term sheet might include a limited period of exclusive negotiation, it should otherwise be non-binding.

Two: Should We Create a Separate Entity for the Deal?

Probably not. Joint ventures often make a deal more difficult to negotiate, more complicated to administer, and more challenging to wind down. They can provide some tax advantages and additional liability protection and may also provide licensors more ability to set product pricing, since antitrust laws restrict licensors from setting prices charged by licensees. Generally, parties will be well advised to avoid getting bogged down in negotiating how to govern and unwind a joint business entity.

Three: Will We Have to Show our In-Licenses to our Prospective Partner?

Yes. Due diligence in a strategic alliance starts with confirming that the partner actually owns or controls the relevant IP. When crucial IP is licensed to the biotech company from another party, the partner will want to confirm that the partner would continue to have rights to the technology even if the biotech company defaulted in its obligations. Ideally, the biotech company will secure the ability to grant future partners enduring rights to in-licensed technology when it acquires rights to the technology.

Four: Will My Partner Agree not to Develop or Market Competing Products?

Maybe. For an appropriately-defined field, it may be feasible to get a partner to agree not to develop or market competitive products, but the obligation may need to be reciprocal. Broad restrictions may run counter to public policy and afoul of anti-trust laws, not to mention being unacceptable for commercial reasons. While a licensee may worry that the licensor's next-generation product may erode the value of the licensed product, the licensor will want assurance that the licensee will devote sufficient resources to the licensed product. Addressing these concerns requires tailoring the scope of licenses granted, the due diligence obligations of the licensee, any non-competition covenants, and creating a mechanism for handling competitive products that arise based on a change of control transaction.

Five: Do We Want Co-Promotion Rights?

Maybe. Wall Street has been rewarding biotech companies that demonstrate not only the ability to create marketable products, but also to capture a large share of revenues through direct commercialization or profit-sharing. But before insisting on an active role in future commercialization, the biotech company should confirm that it can build and maintain a sales force that can effectively address the relevant market.

Six: Can I Get Royalties After My Patents Expire?

Maybe. This can constitute patent misuse which violates anti-trust laws and can jeopardize the patents. However, if the product includes unpatented, proprietary know-how, it is not unusual to seek royalties for the longer of the life of the patents or ten to fifteen years after first commercial sale. When the patents expire, the royalty rate should be reduced to reflect that the continuing royalty is associated with the know-how license, not the patent rights.

Seven: Who Should Bear the Risk of Product Liability Claims?

Good question. In a profit-sharing deal, product liability can readily be allocated in the same proportion as the profits. In license deals, it often depends on the stage of the transaction. If the licensee has substantial input on clinical development and regulatory approvals, it should accept all or most of the risk. On the other hand, in a later stage license deal, the licensor may need to accept more of the product liability risk.

Eight: How Should We Deal with Patent Maintenance and Enforcement?

Carefully. The licensor will want to control its IP to ensure that broad patents are issued and that validity is vigorously defended. At the same time, worldwide patent filings may be prohibitively expensive and unnecessary, so the parties will need a sensible way to decide where to seek coverage and how the costs are allocated. If a third party infringes the patents, the costs of enforcing the patents and resulting proceeds will generally track the overall economics of the deal, but control of litigation to enforce patents can be a sensitive matter, particularly where the licensed patents are vital to both the licensed product and also to other aspects of the licensor's business.

Nine: What Rights Should I Try to Get Back if the Collaboration Terminates?

As much as you can. For starters, the licenses granted to the partner should end. In addition, if the partner has used the IP to develop improvements, you should get rights to those inventions. You will also want to obtain ownership or at least the right to use clinical, pre-clinical and post-approval data and information and regulatory filings (e.g., INDs and NDAs). If possible, you will want to obtain access to a reliable supply of material by obtaining inventory and getting either a commitment of the partner to supply product or to transfer of manufacturing contracts and know-how.

Ten: What Other Questions Should I Ask My Lawyer?

Lots. Will the Hart-Scott-Rodino antitrust rules apply? If the alliance partner is making an equity investment, can I use the investment documents from my last round of venture capital? Does it matter how the word “Affiliates” is used and defined in the agreement? What rights should I grant the partner to inventions discovered during the collaboration? Will they get a right of first negotiation or right of first refusal on future products? What is the best way to resolve deadlocks? What happens if my partner puts the product on the back burner? What happens when one of the parties undergoes a change of control?

Author's Note: This article is based in part on a presentation given by the author together with David Redlick of WilmerHale. The author gratefully acknowledges David's contributions but takes full responsibility for any errors.

© 2006 Bill Wofford. All rights reserved.

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