United States: Avoiding Common Pitfalls: Licensing New Biotech Inventions

New biotechnology inventions from universities can seem ideal for development. But before considering a licensing agreement, pharmaceutical companies should have the answers to some very important questions about technology transfer deals.

The university environment offers a number of attractions to pharmaceutical companies interested in accessing new biotechnology inventions, whether the driving influence is harnessing unique talent, obtaining a window on a new technology, or jump-starting a business initiative. However, it is possible for a company to become smitten by the excitement over a new technology, yet omit normal due diligence about the scope of the university's intellectual property portfolio.

Regardless of the fame of the inventor or the prestige of the institution, companies should apply the principle of caveat emptor to all technology transfer deals. Without exception, a company must focus on the "quality" of the merchandise being offered. That is because it will be delivered without warranties and will not be accompanied by any indemnification to shield the licensee from lawsuits by third parties.

Hence, companies should consider the following issues as part of an intellectual property due diligence exercise before licensing a biotechnology invention.

The starting point in dealing with a university is to take an inventory of where it has made patent filings and to review each of those filings. University technology transfer offices lack the budget to do patent filings on the scale generally deemed appropriate by pharmaceutical companies. Consequently, they often fail to make international patent filings because of the expense. International filing deadlines may lapse, thereby forever precluding protection in an important market.

In the university environment, publication may occur, which can undermine the validity of a subsequent patent application. The general rule in the United States is that publication cannot occur more than one year prior to the filing of a patent application. However, in many non-U.S. countries, publication prior to the filing of a patent application may be fatal to obtaining a patent in that country. Different jurisdictions may apply slightly different approaches, so it is best to check.

Obtaining a patent opinion as to the validity of the patent application in question is sensible. Universities usually lack the budget to invest in such opinions before filing a patent application.

It may be the case that the ability to obtain patent protection is uncertain, as with partial gene sequences or expressed sequence tags. Other forms of intellectual property protection-for example, trade secrecy-may be preferable, although they may be much less conducive to implementation in a university environment.

For example, many people have come to the conclusion that the structure of a biological receptor, usefully only as an assay target, is best protected as a trade secret rather than under the patent laws. That is because the claims of a patent application will ultimately become a matter of public record, typically after 18 months, making it very difficult to police and charge royalties for actual use of the invention.

Inventions in the university setting are often the result of joint collaboration among persons at different academic institutions. For the license to be meaningful, the rights of all co-inventors must be conveyed to the company. That may mean negotiating with several academic institutions, although it is the practice under those circumstances for the institutions to designate one institution to take the lead in negotiating.

The rough justice of the patent law values the contributions of each co-inventor equally, regardless of their actual contribution to the invention. The consequence of failing to get assignment to one party-from all the inventors-is joint ownership. That means that co-inventors can do whatever they want, independently, with their patent rights.

Such "joint" activities can destroy the commercial value of an invention. Therefore, before entering a license regarding a joint invention, there should be an agreement giving one party-the licensor-sole authority to act on behalf of the other parties.

Besides the technology license, the pharmaceutical company may need a separate license to use biological materials such as human tissues or the genetic components thereof. Those licenses are contained in separate documents, sometimes referred to as "material transfer agreements." Use of such material or information from human studies may also be subject to approval by separate university committees concerned with patient ethics, human experimentation, and similar subjects. Such committees function independently of the licensing office.

It is particularly important for a company to license everything it needs. Among university administrators, there is a particular sensitivity to a phenomenon referred to as "pipelining," where a corporate sponsor seeks to gain continuing access to the stream of inventions emanating from a university laboratory. Universities will typically avoid giving an omnibus license to future enhancements, improvements, or follow-on inventions.

An indirect way to gain access to new developments is to sign personal consulting agreements with the relevant inventors, so that inventions derived from their activities outside the university environs are for the benefit of the licensee. Here, a company must understand the "one-day-a-week" rule, which restricts the amount of outside consulting an academic inventor can perform for commercial purposes. Perhaps even more challenging is avoiding the use of any university resources under such personal consulting arrangements-such as cheap graduate student labor-as this will enable the university to assert an ownership stake in whatever intellectual property develops.

Will the pharmaceutical company exploit the technology in combination with other technologies, and how will that affect the distribution of royalties?

When a company needs to license other technologies in addition to the principal technology owned by the university, it should negotiate "royalty stacking" provisions, which allow a right of offset against royalties owed to the university in multiple royalty situations. The offset is typically up to 50 percent of royalties owed to third parties. That offset can in turn reduce the royalty due to the university by up to 50 percent.

Failure of the patent application to live up to expectations should also reduce the royalty. For example, it is important to stipulate that the royalty payable to the university will be decreased if the patent application in question fails to issue as a patent, or if it is subsequently held invalid or becomes the subject of a suit by a third party for infringement. The licensee should also be able to itself sue infringers-thereby preserving the value of the patent-and to offset its litigation expenses against the royalties owed to the university.

In addition to wanting a fair return for a license to its intellectual property, the university has a keen interest in covering its overhead for research going forward. Thus, a sponsored research program may also be part of the price of admission for access to the technology.

Besides a consulting arrangement or institutional royalty-sharing policies, are there other incentives a company can offer an inventor?

Although inventors personally stand to receive 20-30 percent-depending on the university's policies-of any royalties received by the university, royalties can be extremely delayed gratification. Companies may prefer to offer academic inventors direct equity as an added incentive because required sharing between the university and the inventor typically fails to extend to other types of payments. Those include up-front license fees, milestone payments, or equity in the licensee-increasingly a part of the deal when the licensee has not yet gone public.

However, equity ownership by an inventor may preclude that inventor from receiving sponsored research funding because of university conflict-of-interest policies. The typical dividing line for conflict-of-interest issues is the commencement of clinical research. Valid or not, universities believe that the potential for financial self-interest to color a researcher's judgement is far greater-and certainly more dangerous-when direct patient care is involved.

Notably, the concern over financial interests biasing judgement has centered on equity ownership. Typically there are fewer restrictions on an academic receiving cash compensation as a consultant to a company while participating in a clinical study of a drug owned by that company. However, in that case, disclosure of the financial interest is typically required in connection with any publication of the results of the clinical research. FDA has also proposed that such disclosure become a part of regulatory submissions.

The clear answer is the technology transfer officer. Under the Bayh-Dole Act, the U.S. government, which funds most biomedical research, has delegated this part of the process to the university. Academic inventors are required under the act to assign their rights to the university in exchange for the opportunity to receive government funding.

Of course, the university technology transfer office consults the inventor throughout the process. If an inventor is opposed to a particular for-profit licensee, the chances of a successful license transaction are greatly reduced. However, the university calls the shots on the economic terms of the license, not the inventor.

Before embarking on a negotiation, companies must be familiar with the university's intellectual property policy as well as its policy concerning faculty participation in industry arrangements and conflict-of-interest policy. Because many universities begin license negotiations with a standard "form" of license, it makes sense for a company to ask for a copy of the form in advance and to study it carefully.

It is also helpful to gather data about comparable transactions. That will convey the message to the institution that the deal being offered is fair and customary. (See "Compare and Save.")

There are potentially significant differences between institutions, often with regard to "diligence" requirements placed on the licensee-that is, what commercialization milestones must the licensee achieve in what time period to keep the license in effect? Such performance standards are actually required as a condition of the license by the U.S. government. However, under the Bayh-Dole Act, the university has the discretion to determine the exact diligence standards.

To take two academic rivals form either side of the Charles River in Massachusetts as an example, Harvard and MIT differ significantly in their approach to license agreements. Harvard favors subjective standards in its licenses, leaving ultimate discretion to the technology transfer officer involved in the deal to determine whether commercialization is proceeding as expected.

Perhaps not surprisingly, MIT requires that numerical performance targets be agreed upon in advance, to be achieved in a specified period of time-for example, FDA filings and approvals, sales, and so forth. Hence, studying in advance the particular licensing approach favored by the university is a good idea. Forewarned is forearmed.

 This article was first published in Pharmaceutical Executive, April 1998, vol. 18 n.4.

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.