Part I described various strategies to help smaller and early-stage life science companies establish an intelligent IP strategy and Part II described various strategies used when preparing for a transaction. In this Part III, we discuss the various relevant factors for choosing the right transaction.
Understanding an underlying deal rationale is essential for a smaller or early-stage life science company to determine which type of transaction should be pursued. A larger biopharmaceutical company (the prospective licensee or acquirer) will always have a deal rationale, i.e., a business reason for entering into a license or acquisition, before concluding a license/acquisition transaction.
To successfully close a transaction, the smaller or early-stage life science company must evaluate the deal rationale from the prospective licensee/acquirer viewpoint. The smaller or early-stage company must be ready to convince the prospective licensee/acquirer that the deal provides a requisite commercial and industrial logic. A good deal rationale usually includes a business model for generating revenues from the target technology or target company post-acquisition. The business model can also include removing a perceived obstacle. Therefore, the deal rationale always has one or more underlying IP assumptions. For example, the power of patent rights to confer market exclusivity to the owner or licensee provides significant business advantages to a licensee or acquirer.
Unfortunately, because smaller or early-stage companies have fewer resources, experience, and leverage than larger biopharmaceutical companies, negotiating with the larger company before understanding the deal rationale can lead to suboptimal results.
Part III discusses three transaction types in turn: (a) a license, (2) a strategic partnership, and (3) a merger/acquisition (M&A). Each has similarities, but each also has distinctive qualities. Some of the more significant factors that weigh in favor of each transaction are summarized in Table I.
A license is a transfer of rights to an intellectual property asset without transferring title.  Many kinds of IP licenses are available to the licensing parties, including a conveyance of exclusive rights, a transfer of sole rights, and a transfer of non-exclusive rights.  The variations on each of these kinds of IP licenses are almost endless, involving such factors as retained rights, specificity as to particular fields, geography, or timeframes.
A license strategy is preferable when the companies want to preserve their independence, perhaps because of divergent business goals or pending litigation against one of the parties. Such a license strategy allows a company looking to acquire technology to be selective rather than taking the good with the bad. A license permits companies to take advantage of opportunities for obtaining related products where there may be a need for freedom to operate in a particular technology space. This provides a “win-win” situation for the licensor and licensee when the two companies do not compete for the same industry space or products. For a smaller or early-stage company, a licensing strategy is an excellent way to recover revenue from IP that is not core to its operations.
Choosing the Right Transaction
Deliberately creating potential freedom to operate issues for larger biopharmaceutical target companies through patent filings is an aggressive but effective way to create licensing opportunities for technology invented and developed in a smaller or early-stage life science company.
In an ideal world, the licensor company has issued patents. Unfortunately, the patent examination process is typically very slow. Several years can elapse between the original filing of a patent application and the issuance of a patent. Nonetheless, a smaller or early-stage company can design a successful technology transfer program using patent applications – even provisional applications. As shown above, the value of an issued patent to a license arrangement is its ability to exclude competitors from the market. The value of a pending patent application to a license arrangement is its potential ability to exclude competitors. When a patent application is far enough along in prosecution to have received a favorable International Search Report or Written Opinion, or a favorable domestic Office Action, the potential licensor can demonstrate a potential ability to exclude competitors. The apparent risk to the licensee will be reduced, so the value of the patent application should increase. There will be a clear relationship between the value and the “newness” of the application, with the value appreciating as the probability of issuance increases (although the value curve is not necessarily linear).
Utility patent applications filed with the USPTO publish 18 months after the first patent filing, the “priority” date. After publication, an applicant accrues provisional rights that permit (in limited circumstances), the applicant to obtain for infringement of any patent issuing from the application, reasonable royalties retroactive up to the application’s publication date.
To maximize licensing opportunities, the smaller or early-stage company should create its IP to be as complete and divisible as possible. Ideally, a patent portfolio should include one or more “composition of matter” patents, with several “method of use” patents covering planned activities for each field to be licensed. Broad patents should be backed up with other related patents having very specific and narrow claims. Patents with broad claims are often challenged for failure to meet the written description and enablement requirements of the patent laws. But it is harder for challengers to invalidate narrow patents.
Strategic collaborations continue to be a very popular business strategy in the life science and pharmaceutical industries. Because of the fierce competition for good late-stage life science assets, larger biopharmaceutical companies must look to early-stage life science companies to access new and promising pharmaceutical compounds and therapeutic technologies. For smaller and early-stage companies with less mature or developing technologies, collaborating with a larger biopharmaceutical company can be a sensible way to access greater knowledge, experience, and resources. A strategic partnership can also help the smaller or early-stage company increase their visibility, validate its technology in the life science industry, help fund their R&D programs. Entering into a successful strategic collaboration with a respected biopharmaceutical partner can also attract further private or public equity investments.
Collaborations are particularly suitable when one company has a “platform technology” that fits into the pipeline of another company, when the technology platform is highly dependent on Know-How, when the platform can benefit other initiatives in the larger company, or when the business goals are common as to a particular indication or research program. A company should instead consider a license – rather than a collaboration – when its products are mature or when the company has truly dominant IP positions.
Collaborations allow companies to preserve their independence while sharing the costs and research burdens. Collaborations are appropriate when the companies each want a certain degree of control or input into the decision-making processes while maintaining independence. Each party must bring something to the collaboration. A smaller or early-stage company’s goal during the early negotiations for structuring any collaboration is to show the people on the other side of the table that they need you and that they cannot appropriate your research or otherwise design around your intellectual property. As discussed in the previous Part II, provisional patent application filings should be in place before the parties exchange any information. The smaller or early-stage company should also hold back some critical Know-How from patents after the initial filing. The IP used by a smaller or early-stage company to drive a collaboration should overcome a critical problem for the larger company. But the final collaboration arrangement should force the larger company to go to people in the smaller or early-stage company – not documents – for the solution.
Contract research is a variation on the strategic partnership model. This contract research structure is dominated by one party that will generally own the results of the research and any resulting IP. A failure to properly structure such a transaction type has often jeopardized IP ownership in process improvements and testing methods. The contractual ownership of any IP should be clear before commencing any actual work. Never assume that the obligation to pay for the work will automatically provide ownership in any resultant IP. In cross-border deals, this problem can be magnified.
Merger & Acquisition (M&A)
M&A has recently become an attractive exit strategy for smaller and early-stage life science companies. An acquisition deal requires a high upfront cost for the acquirer, but lower costs overall than licensing transactions, where a long-term obligation to pay milestone payments and on-going royalties can eventually become expensive.
In some cases, a merger can be the end-stage of an M&A acquisition deal, where the target company is merged into the operation of the acquiring company. After the merger, some product lines can be assimilated, and other assets can be sold off. This is where understanding the deal rationale is of paramount importance. IP usually becomes a principal asset for a merger. Therefore, the smaller life sciences target company should take all necessary steps to perfect its IP, lest defects reduce the final company valuation. For example, when the smaller life science target company will be ceasing operations due to lack of funds, getting the IP in good shape will maximize the sale price, even when the acquirer is otherwise getting a bargain.
In another model, the merger is essentially a marriage of two companies. In a “consented-to” transaction, both companies usually have common business goals, but the acquirer wants to control all IP and business decisions.
In more aggressive merger deals, the acquirer may be motivated solely by the target company’s IP. When the smaller company’s target IP dominates the industry space or has posed a problem to the acquirer in the past, or when few opportunities exist in the market for similar products, a larger company may acquire a smaller or early-stage target company solely to obtain the IP assets, with little interest in the other assets.
The optimal acquisition target companies have late-stage products with a good pipeline and no litigation problems. The smaller or early-stage target company IP should dominate the particular industry space-or at least the part most significant to the larger acquirer company – but must also be defensible. To position a smaller company for acquisition, the IP portfolio must be complete. The objective is to generate maximum value for the IP assets for the eventual sale.
 “[A] patent grant is a legal right to exclude, not a commercial product in a competitive market.” Intergraph Corp. Intel Corp., 195 F.3d 1346, 1355 (Fed. Cir. 1999). “Implicit in the right to exclude is the ability to waive that right, i.e., to license activities that would otherwise be excluded, such as making, using and selling the patented invention in the United States.” Prima Tek Il, L.L.C. v A-Roo Co., 222 F.3d 1372, 1379 (Fed. Cir. 2000).
 A license is a contract governed by the ordinary principles of state contract law. State Contr. & Engineering Corp. v. Florida, 258 F.3d 1329 (Fed. Cir. 2001).
 When drafting patent licenses, the licensing parties should be careful to accurately describe what kind of patent rights are being licensed. If the description of the rights is ambiguous in the license document, unfortunate difficulties in enforcing the transferred patent rights can results. See, TM Patents L.P. v. International Business Machines Corp., 121 F.Supp.2d. 349, 58 U.S.P.Q.2d 1171 (S.D.N.Y. 2000); Mars Inc. v. Coin Acceptors Inc., 527 F. 3d 1359, 87 U.S.P.Q.2d 1076 (Fed. Cir. 2008); and many other cases.
 “The time to obtain a patent depends greatly on the technology area of the invention, the amount of negotiation that is required with the patent office to obtain the patent, and on other factors …. In the computer, electrical, internet, and business method arts, this time can range from 18 months to nearly three years, just to get a first examination. ” Leonard Hope, How Long does it take to get a patent?, The Patent Prosecution Law Blog, http://www.patentprosecutionblogcom/ archives /patent-prosecution-basics-24-how-Iong-does-it-take-to-get-a-patent.html (posted Oct. 9, 2005).
 35 U.S.C. §122(b)(1)(A) (2000).
 35 U.S.C. §154(d)(1) (2000). However, the patent that ultimately issues must cover “substantially identical” inventions as published in the provisional applications, Id. §154(d)(2), and the action must be brought within six years of the issuance, id. § (d)(3).
 35 U.S.C. §112 (2011).
 See, LizardTech, Inc. v Earth Res. Mapping, Inc., 424 F.3d 1336, No. 05-1062, 2005 U.S. App. LEXIS 21434, *31 (Fed. Cir. 2005) (holding that a specification that clearly describes one narrow embodiment of the invention did not support a broad claim).
 U.S. Department of Justice and the Federal Trade Commission, Antitrust Guidelines for the Licensing of Intellectual Property, January 12, 2017, § 2.3 Procompetitive Benefits of Licensing.
 Many small companies have learned, to their dismay, that patent applications must be on file before beginning negotiations with potential transaction partners, even when they believe that the negotiations are confidential. See, e.g., Group One Ltd. v. Hallmark Cards Inc., 254 F.3d 1041, 59 U.S.P.Q.2d 1121 (Fed. Cir. 2001).
 See, e.g., Bayer AG & Bayer Corp. v. Schein Pharms., Inc., 301 F.3d 1306, 1314 (Fed. Cir. 2002) (“Unlike enablement, the existence of a best mode is a purely subjective matter depending upon what the inventor actually believed at the time the application was filed.”); Eli Lilly & Co. v. Barr Labs., 251 F.3d 955, 963 (Fed. Cir. 2001) (“[T]he factfinder must determine whether, at the time of filing the application, the inventor possessed a best mode for practicing the invention.”)