Strategic Business Alliances in Biotech Industry

Formation of strategic business relationships among and between industry and academia accounts for an increasing amount of the growth of the biotechnology industry. Because biotechnology companies are fundamentally dependent upon their intellectual property, perhaps the most critical aspect of these agreements is the manner in which rights to the IP of each party, as well as the IP that will be generated during the relationship, is addressed in contracts governing such relationships.

Handling this facet of strategic alliances is complicated by the fact that, under the patent laws, biotechnology is considered an "unpredictable art," thus biotech patents generally are accorded less breadth than patents in other technology areas. As a result, the legal form and language used in strategic business agreements must be well-planned, clear and take into account the criticality and potentially changeable nature of each party's intellectual property interests. This article addresses a few of the issues to be considered by parties forming strategic alliances covering an "unpredictable technology," as well as some of the types of terms these agreements employ.

What does it mean to have the patent law regard biotechnological innovations as inventions in an unpredictable art? In short, it means patents are interpreted less broadly in this area than those that cover other inventions. For example, a patent that describes and claims a mechanical device is generally construed to cover the device expressly discussed and claimed in the patent as well as obvious variations of the mechanism.

In contrast, for biotechnological inventions, the patent itself must describe in clear and express terms the invention, and generally will not be interpreted by a court to encompass obvious variations of the disclosed and claimed invention. Thus, in an area such as molecular biology, where a minor modification to an amino acid sequence, for example, can have a profound effect on the bioactivity of the protein formed by the sequence, if that variation is not expressly contemplated in the patent itself, it will not be deemed within the scope of the patent.

The implications for companies operating in this space are significant. Narrower patent scope means that competitors can enter the market with technologies that are similar to those under patent and even can obtain their own patents covering those similar technologies. Obviously this works for and against market participants and highlights the importance of clearly defining the technology that is the subject of any strategic business agreement. In particular, the technology should be defined in a way that anticipates, to the extent possible, and allocates rights to the types of variations that may result from development of the technology. Thus, if a company is licensing from a university a critical nucleic acid sequence encoding a protein, it is reasonable to anticipate that substitutions or deletions of particular nucleotides, alterations of particular amino acids or changes in post-translational modifications will be identified as advantageous as the technology develops. Anticipating such modifications and clearly stipulating how they will be encompassed under the agreement is important.

Equally important is anticipating such modifications in the substantive patenting process. Development of a patent portfolio that provides protection for downstream modifications of the technology serves several purposes. Primarily, it allows the portfolio-holder to prevent others from using the protected technology. Additionally, the portfolio itself can become a valuable negotiating tool to obtain rights to others' technologies, in the form of cross-licensing arrangements, which are useful to settle disputes, as well as to achieve other business goals by allowing the parties to take advantage of synergistic or platform technologies.

The dynamic nature of biotechnological inventions also influences other terms of agreements governing such technology, and creativity is the norm. Indeed, "standard terms" for these agreements are largely a myth, with royalty rates, up-front and/or milestone payments, equity participation in new entities, etc. varying widely depending upon the individual deal.

To address the vagaries of developing biotechnologies, parties to strategic agreements have used a range of royalty terms that may ratchet up or down over time depending upon the course of development and the status of patents covering the technology; milestone payments at various developmental stages; reach-through royalties on research tools to provide revenue from products made using the research tools; equity and equity-like structuring of joint ventures or "spin-off" companies; and many other creative terms and structures to address the risk/reward profile of the deal.

In the end, the unpredictability of the technology drives unconventional deals that must be structured based upon a thorough analysis of the technology, and by anticipating and accounting for how the technology will transform during its development.