As Prescribed

Biotech Week Boston

Today marks the kickoff of the Biotech Week Boston event series, and for the rest of the week our As Prescribed blog will feature posts exclusively from our Boston life sciences lawyers. Local partners Michael Barron, Laurie Burlingame, and Stephen Altieri will be blogging from the capital of the commonwealth, where they are expressly positioned to advise biotech companies at all phases of their lifecycles, as well as the entities that invest in them.

In this first Biotech Week Boston As Prescribed post, partner Michael Barron outlines how to negotiate a patent and know-how license for the right to further develop and commercialize discoveries uncovered by local universities.

The spark of many early-stage biotech companies located in and around Boston originates from a discovery in a lab located in one of the many outstanding universities also located in and around Boston.

A biotech company interested in commercializing a discovery made at a university will need to negotiate a patent and know-how license for the right to further develop and commercialize the discovery. Many times, if the company interested in the discovery is newly formed and in the process of raising funding, it will elect to enter into an option agreement with the university that will provide the company with the right to negotiate a license for the discovery at a later time. Usually such an option will be for a year, during which the company will have time to raise its initial funding.

If and when a company decides to move ahead with negotiating with the technology transfer office of a university for a license to a discovery, the license will customarily have the following principal terms:

  1. Exclusive/Non-Exclusive: The license being granted will either be an exclusive license or a non-exclusive license. The fees associated with an exclusive license will usually be higher than the fees for a non-exclusive license. If the license is an exclusive license, the parties will also negotiate how broad the scope of exclusivity will be. For example, the field of use for a product developed from the discovery may be limited to the treatment of one particular disease in humans rather than being for all uses in humans and animals.
  2. Patent/Know-How: The license will generally be split into patent rights and know-how rights. The patent rights will apply to specifically listed patents covered by the license. The know-how rights tend to be more amorphously described but will be related to the patents.
  3. Upfront Payment and Annual Maintenance Payments: The academic institution may charge an initial upfront fee for the license and seek to cover the costs it may have incurred for the prosecution of a patent covering the discovery. Additionally, it may seek an annual fee to be paid by the company during each year when the university will not be receiving royalties from the sale of products based on the discovery. The purpose of the annual fee is to provide a trigger for the university to use as a mechanism to terminate the license in the event the company does not pay the annual fee because either it may not be actively developing the discovery into a commercial product or is having difficulty raising funding for the further development of the discovery into a commercial product.
  4. Patent Costs: The university customarily retains control of the prosecutions of patents covered by the license and passes the prosecution costs to the company holding the license.
  5. Royalties: The parties will negotiate the royalty to be paid to the academic institution for sales of products developed from the discovery. The royalty is paid on “net sales.” The parties will need to agree on how net sales are actually calculated.
  6. Sublicense: The company will most likely seek to have sublicense rights so that it can sublicense certain development and commercial rights to another company. A university will usually agree to grant sublicense rights under certain circumstances but will request higher royalties and other payments in exchange for granting sublicense rights.
  7. Development Milestones: The university will request lump sum payments when certain development milestones are achieved. It will also require in the license that such development milestones be achieved within a certain time period.
  8. Financial Milestones: The university will request lump sum payments when certain product sales milestones are achieved.
  9. Equity Grant: As part of the consideration to grant a license to the company, the university may request a grant of shares of the capital stock of the company seeking a license. In such a case, the parties will negotiate what percentage of the ownership of the company will be granted to the university. It may also request that such percent ownership be non-dilutive until such time as the company raises an agreed-to amount of additional funding from the sale of its stock to investors. The amount that has to be raised by the company, after which the academic institution’s ownership in the company can be diluted, will be subject to negotiation.

There are, of course, other terms in a university license agreement that need to be reviewed, considered, and negotiated. Early-stage biotech companies need to keep in mind when negotiating a license with a university that potential investors, when making an investment decision, will be very focused on whether the agreed-to principal terms are commercially reasonable.

Check back tomorrow for a post by partner Laurie Burlingame on how emerging companies can prepare in advance of initial financing.