Many biotechnology companies are spin-offs from universities and other academic institutions, such as research centres or hospitals. While the founders of these biotechs very often continue to hold positions with their academic institutions, the intent of creating the spin-off is to run it as a private business. The result is an interesting clash of cultures between the academic and business worlds. Educational and research institutions value academic and scientific publication of research and the open dissemination of technology for societal advancement. They also operate on a not-for-profit basis. By contrast, private business stresses maintaining the market value of the technology through obtaining exclusive rights to the technology and conducting controlled exploitation in order to generate maximum profits.
McCarthy Tétrault Notes:
Of course, the reality is seldom as clear-cut as the foregoing suggests. Academic institutions have become used to earning money from biotechnology spin-offs. Thus, technology development offices often behave much like private sector licensors in matters such as granting exclusives in return for higher royalties, valuing technology based on industry norms and guarding the secrecy of their business and financial terms to preserve their negotiation leverage in dealings with private-sector licensees. However, real differences exist nonetheless between institutional and private-sector biotechnology licensing, which derived from their different normative frameworks. At the spin-off stage, many of these differences will be tilted in favour of the academic institution. The closer the technology is to pure science (as opposed to a commercialized drug), the more embedded it will still be in the academic and research culture. Moreover, at the spin-off stage, the institution often holds greater power in the negotiations for a number of reasons:
1. The institution owns the technology and decides when and if it will be commercialized. Since the institution’s ‘business’ is research and education, drug commercialization is a sideline and the institution can often afford to wait for the right terms before licensing.
2. Academic institutions are highly risk averse and will not assume risks that private businesses consider normal.
3. To a certain extent, institutions that spin off technology are acting outside of their element. They may not be entirely comfortable in a business environment and therefore may be inflexible on negotiation points that would contain ‘gives’ in pure business deals.
4. Spin-off companies are often created by the scientists who invented the technology and who continue to work at the institution. They do not always seek independent business and legal advice, nor fully appreciate the need for that advice.
However, if the science bears promise and development proceeds, the nearing prospect of commercializing the technology will bring greater weight to business concerns. In particular, incoming investors or partners may require amendments to the original license as a condition of investing or may make payment of future development and commercial milestones to the spin-off conditional upon amendments being made to the original institution license. Accordingly, biotechs often need to renegotiate their original licenses with the institution.
Frequently renegotiated terms
Although there is no limit to the possible terms that a biotech may wish to renegotiate with its licensor institution in the context of a particular financing or partnering transaction, some of the more common ones are considered below.
Ownership of improvements made by the licensee — In the initial stages of a biotech spin-off, it may be staffed and run by persons holding appointments at the institution. There may be good reasons in these circumstances for improvements to the licensed technology made by the licensee to be owned by the institution (and licensed back to the spin-off). However, once the spin-off reaches the stage of wishing to enter into development collaborations with drug partners, the partners will expect the collaboration improvements to be owned jointly by the collaboration, or solely by the collaborator if made by the collaborator. The ownership rules of the original license therefore need to be rewritten at this stage. A possible compromise might involve governing of the ownership of collaboration according to the rules of inventorship (i.e., jointly by the collaborators if made jointly or solely by a party if made solely, but in any case, not assigned back to the institution), but with collaboration improvements remaining royalty-bearing vis-à-vis the institution if commercialized.
Royalties — Original royalty rates, often set early in the scientific stages of development, may need to be revised to account for a deeper understanding of the intellectual property environment and partnering prospects for the technology.
Development and commercialization milestones — Development and commercialization milestones in early stage licenses are very often ‘best guesses.’ After a few years of development of the technology, more sophisticated and equitable milestones can be devised.
Patent prosecution — Institutional licenses will very often provide that the institution itself will conduct intellectual property prosecution and maintenance. When the spin-off reaches a higher level of business maturity, these responsibilities are very often taken over by the spin-off.
Confidentiality provisions — Confidentiality and publication provisions of institutional licenses may not be sufficiently broad for disclosures required by securities laws and stock exchange policies, particularly if the spin-off becomes a public company, or for disclosures to drug regulators in connection with development of the technology.
Governance restrictions — Institutional licenses may include governance restrictions on the spin-offs, which reflect of the institution’s desire to be involved in their spin-offs’ activities and the perceived need for the institution’s technology development office to tutor their early-stage spin-offs in business matters. Dealers and partners will typically require such restrictions to be removed so that they can impose their own restrictions.
Termination rights — Institutional licenses sometimes have multiple hooks into the licensed technology that, if triggered, will give rise to termination rights in favour of the institution. This reflects the high failure rate of biotechnology companies and the resulting interest of the institutions to recover the technology in order to re-license it to other prospects if the original licensee fails or doesn’t perform. Once the biotech has reached a more mature stage of corporate development and financing, strong arguments can be made that these hooks by the institution into the intellectual property should be removed in order to place the spin-off on a stronger and more independent footing.
Sublicensee protection — An institutional license will very often provide that sublicenses will terminate if the head license with the spin-off terminates. This term may impede the ability of a successful spin-off to partner the technology. It therefore may be renegotiated to provide protections to collaborators of the spin-off, such as the right to obtain a license directly from the institution if the spin-off’s head license fails.
Assignment of intellectual property — It may be possible to negotiate assignments of intellectual property from the institution in lieu of the original license. Intellectual property assignments would generally require the spin-off to be on a strong business footing at the time of the renegotiation.
Many biotech spin-offs from academic or research institutions find themselves either wanting to renegotiate their licenses or being required to do so by investors or partners. For their part, the institutions are tied to the success of their spin-offs and will have a strong interest in placing the license on terms that work for the spin-off. Legal and business advisors experienced in working in the nexus of the academic and business worlds can play a large part in these renegotiations by knowing where the ‘gives’ are for the institutions and which terms of institutional licenses (as idiosyncratic as they may appear to private business) are non-negotiable for the institutions. The result can very often be ‘win-win’ renegotiations for both the institution and the spin-off.