Answer
: Yes, because in each case the university technology licensing office has different concerns (see "Pharma's University Collaborations," p. 29).Let's start with the standard license to a start-up biotechnology company. The biotech (we'll call it Bio) generally pays a modest upfront payment (designed to ensure Bio's intent to commercialize); milestones due upon achievement of significant regulatory and commercial goals; and a royalty based on net sales. Negotiations will ensue on a variety of fronts, linked thematically by the university's overall anxiety concerning Bio's ability to continue to muster over time the financial and managerial resources necessary to successfully commercialize the product.
This anxiety manifests itself in a variety of ways. The license will be for a narrow field of commercial application, possibly accompanied by options that allow Bio to negotiate licenses for additional disease indications. In other words, the university will want to retain the flexibility to give licenses for other applications to different companies, who may have more wherewithal to commercialize a particular other application.
The deal will almost certainly include a required, annual minimum royalty payable by Bio. If Bio doesn't pay it, it has to hand the technology back to the university. If there are commercial sales, the royalty obligation will be at the full rate stated in the contract.
It may be possible for Bio to negotiate a reduced royalty in exchange for issuing equity to the university. If so, the university will want a minority equity interest (typically 5% to 10%), and will want the right to participate pro rata in future financings by investing in the start-up. If equity is part of the deal, the university will be concerned about potential conflicts of interest on the part of its investigators, who may also be equity holders in the company.
The university will be sensitive to "technology flipping"; i.e., a rapid sublicensing of the technology by Bio to a third party before much value is added. As a result, licenses to companies like Bio will give the university a large share of any sublicensing income which Bio earns if Bio adds little value to the technology. In the event that Bio legitimately sublicenses the technology, but then subsequently gets into financial difficulties, the university will want the right to cancel the sublicense and to renegotiate its own deal with the sublicensee. This can be a tense point of negotiation between Bio and the university, since the university's ability to cancel a pre-existing commercial relationship with Bio will make it harder for Bio to negotiate such a subsequent deal with a pharmaceutical company.
In shaping their collaborations with drug firms, who frequently compete with Bio for access to hot university technologies, tech transfer offices have very different concerns. Take the case of a pharmaceutical company (Pharma), attempting to negotiate a deal for the same technology. The university will seek a large upfront payment from Pharma as well as earlier and larger milestone payments, given Pharma's presumably deeper cash resources. In turn, the university will settle for a lower royalty rate.
The university will still require minimum royalties, since it will want to protect itself against the possibility that Pharma will shelve the product. The minimum royalty mechanism will work the same as it does with Bio: Pharma loses the technology if it fails to pay the fee.
At the same time, Pharma will seek a royalty anti-stacking provision, since it will likely need to license other technologies before arriving at a final commercial product. Pharma will seek to offset up to 50% of these other royalty obligations against the royalty owed to the university; the university will seek to put a floor on reduction of its royalty, typically at 50% of its stated level.
In negotiating with Pharma, the university will seek to use the license as a mechanism to prod Pharma into funding a multi-year sponsored research program, thereby allowing the university to cover a portion of its overhead which is not covered by the overhead rate allowed under government contracts. In return for a commitment of sponsored research funds, Pharma will have the first option to license new technology developments arising out of the sponsored research program (hopefully, from Pharma's standpoint, on the same terms).
Another battleground will revolve around the issue of who continues to prosecute the university's patents which are the subject of the license, as well as who calls the shots in the event of patent litigation. With its significant financial resources, Pharma will want to patent the technology in more jurisdictions than the university would otherwise try to accomplish, and will want to decide on its own whether to sue an infringer and what strategy to employ if it is sued. The university may permit Pharma to control the patent prosecution process.
However, it will be concerned that if Pharma completely controls patent litigation, it may use the litigation to accomplish other strategic objectives, possibly to the detriment of the university's patent portfolio. For example, the university's patent could become a pawn in a larger chess game between two large companies. Pharma might for it's own strategic objectives decide to sacrifice the university's patent-perhaps as part of a royalty-free cross-licensing deal with its rival. While such a deal might help Pharma reach its objectives, it could also have the effect of reducing royalties to the university.
This article was previously published in Start-Up Magazine, Windhover Information Inc. March 1999.
The content of this article is general in nature and is not intended as legal advice related to individual situations. Counsel should be consulted for specific legal planning and advice.