{"id":520,"date":"2020-08-17T09:45:23","date_gmt":"2020-08-17T13:45:23","guid":{"rendered":"https:\/\/www.apslaw.com\/its-your-business\/?p=520"},"modified":"2023-04-26T11:44:58","modified_gmt":"2023-04-26T15:44:58","slug":"driving-revenue-and-deal-flow-through-an-intelligent-ip-strategystrategies-for-smaller-and-early-stage-life-science-companiespart-ii-preparing-for-the-transaction","status":"publish","type":"post","link":"https:\/\/www.apslaw.com\/its-your-business\/2020\/08\/17\/driving-revenue-and-deal-flow-through-an-intelligent-ip-strategystrategies-for-smaller-and-early-stage-life-science-companiespart-ii-preparing-for-the-transaction\/","title":{"rendered":"Driving Revenue and Deal Flow Through an Intelligent IP Strategy; Strategies for Smaller and Early-Stage Life Science Companies. Part II: Preparing for the Transaction"},"content":{"rendered":"

As discussed in Part I<\/a><\/strong>, a company’s technology must have strong intellectual property to establish a significant technology transfer program or prepare for an eventual acquisition. Establishing an intelligent IP strategy can place a smaller and early-stage life science company in a more solid position for future negotiations with larger life science or financial companies. \u00a0However, several additional steps, discussed below, can further strengthen the smaller or early-stage company\u2019s position to close a transaction effectively.<\/p>\n

Internal Due Diligence<\/h2>\n

Before entering into any business discussions with a prospective strategic partner or licensee, a smaller or early-stage life science company should evaluate and understand its own intellectual property and corporate documents. \u00a0The major objective of this exercise is for the life science company to identify and address any IP issues or corporate issues before submitting itself to an external due diligence.<\/p>\n

The internal due diligence should confirm that the company\u2019s research and development candidates and any commercial products are covered by the company\u2019s patents or patent applications. \u00a0The internal due diligence should also assess the scope and strength of the patent coverage. \u00a0The extent and scope of the internal due diligence should estimate and match the rigor of a future external due diligence. \u00a0A prudent company will prefer to cure any potentially adverse issue before the transaction, rather than have it pointed out by counsel representing the prospective strategic partner or licensee. \u00a0Skipping a robust internal due diligence can be embarrassing. \u00a0It can also result in significant delays during negotiations, thus eroding the confidence of the other party, adversely affecting the valuation of the company\u2019s IP assets, or possibly terminating negotiations.<\/p>\n

The steps taken during internal due diligence will also provide comfort to the life science company later, when it is required to provide representations, warranties, and indemnities about the strength of the life science company\u2019s IP in the resulting transaction agreement.<\/p>\n

An internal due diligence should, at a minimum, identify and list the life science company\u2019s patents and patent applications, as well as identify inventions that should become the subject of patent applications. \u00a0The due diligence should also ensure that all the patents and patent applications are owned by the company, such as by having signed assignments from the inventors to the company. \u00a0The due diligence should also identify and list the corporate documents, especially if the company has ever undergone any changes in name, ownership, or status, to ensure that the correct company owns all the patents and patent applications. \u00a0This stage is also a good time to at least begin to assess the strengths and vulnerabilities of the company\u2019s patent portfolio. \u00a0Any gaps in coverage can be tightened up by additional patent filings. \u00a0The company should also review its other business consideration and file or perfect any needed trademark applications or other forms of IP registrations.<\/p>\n

Identifying Potential Transaction Partners<\/h2>\n

The internal due diligence should next analyze the state of the life science industry, to identify potential transaction partners, to assess their products and services, and to prioritize their assets. \u00a0Several technology platforms and databases are available for the patent landscape analyses required for this purpose.[1]<\/a>\u00a0 The potential transaction partners\u2019 corresponding IP can also be identified by checking the company’s website or searching IP databases such as the U.S. Patent and Trademark Office database[2]<\/a> and the European Patent Office Espacenet database.[3]<\/a><\/p>\n

Then, the scope of protection provided by the life science company\u2019s own IP assets must be assessed to learn how a transaction could provide synergies. \u00a0This assessment should verify the \u201cexploitability\u201d of your company\u2019s IP assets from the perspective of the potential transaction partner. \u00a0To do this, the company conducts a non-infringement investigation on its own patent portfolio, again from the perspective of the potential transaction partner. \u00a0If the potential transaction partner can design around your IP, then the transaction partner is unlikely to spend much capital to obtain these rights. \u00a0By the end of the internal due diligence, the company must establish a value for their IP assets, identify the issues that may be used to negotiate a valuation reduction, and prepare to address or counter such issues.<\/p>\n

The purpose of any due diligence is to test the underlying business and IP assumptions in anticipated deal situations. \u00a0The due diligence must assess how the IP reality corresponds with the rationale for the deal. \u00a0The company should conduct any IP due diligence with that end in mind. \u00a0If the technologies from the life science company and the prospective transaction partner can be combined into a new product or a new indication for a known product, then a prudent and inexpensive strategy for a smaller or early-stage life science company is to file a provisional application before<\/em><\/strong> approaching the transaction partner. \u00a0Such a provisional application can establish that the life science company had an earlier conception of the combination. \u00a0This prophetic provisional application could prevent the prospective transaction partner from making an overt or inadvertent taking of the idea for the combination, should the transaction not materialize.<\/p>\n

Note that this preliminary due diligence differs from the formal due diligence conducted during the transaction, where the company will examine in greater detail the strength, scope, and enforceability of the IP; the ownership rights surrounding the IP; and any legal concerns that may affect the value of the IP of the prospective transaction partner. \u00a0The formal due diligence is only possible after the prospective transaction partner provides confidential information under a non-disclosure agreement (NDA) or confidentiality agreement (CDA), discussed below.<\/p>\n

Term Sheet<\/h2>\n

An important early step in a successful transaction process is handling the term sheet. \u00a0Term sheets are common and expected before negotiations between startup companies (in any field) and their prospective transaction partners. \u00a0A term sheet (also called a heads of agreement in some countries) is a document that outlines the expected key financial terms conditions for a partnership or transaction. \u00a0The term sheet sets the expectations for the negotiations of the eventual agreement. \u00a0Significant deviations from these expectations are usually resisted, barring some material issues discovered during the formal diligence process.<\/p>\n

Accordingly, a small or early-stage life science company must be well prepared and must have a good understanding of the value of its assets and contributions to be incorporated in the agreement. \u00a0It must have a good understanding of the value or consideration that it expects from the transaction. \u00a0The small or early-stage life science company should review prior agreements involving the prospective transaction partner to get a sense of how the partner previously structured comparable deals and what terms the partner already deemed acceptable. \u00a0Such information could be particularly useful in countering unreasonable positions that the prospective transaction partner might take during negotiations.<\/p>\n

A term sheet usually is and should be a non-binding agreement. \u00a0However, some life science companies later learn to their disappointment that their term sheet and subsequent behavior are interpreted as binding promises.[4]<\/a>,<\/sup>[5]<\/a> \u00a0A prudent life science company will obtain legal advice to avoid this outcome.<\/p>\n

A good term sheet will describe the important terms of the agreement to be negotiated. \u00a0The parties to the agreement are named. \u00a0The fundamental economic terms are set out, but not with finality or even clarity. \u00a0Terms relating to each party\u2019s level of control in the agreement are also set out. \u00a0Term sheets often outline the steps to be taken by each party before the definitive agreement.<\/p>\n

Many companies assume that the most important parts of the term sheet are the financial terms. However, the other terms are equally important as they will set out the rights that the larger company receives or acquires in consideration for the financial offer, and what risks and obligations are assumed by each party when they enter into the agreement. \u00a0The smaller or early-stage life science companies that underestimate the importance of the term sheet stage, assuming that they can address issues during the subsequent negotiation of the formal agreement, often find themselves in very difficult negotiation positions, which result in unfavorable terms or lost opportunities.<\/p>\n

Unfortunately, many small or early-stage life science companies allow the larger prospective transaction partner to take the lead on drafting the term sheet, perhaps assuming they will offer terms better than the smaller or early-stage company life science company would dare to request. \u00a0The smaller or early-stage company should provide the first draft, because it can advantageously set the stage for the rest of the negotiations. \u00a0When the larger transaction partner takes the lead, the draft term sheet often is heavily slanted in their favor, making the negotiation process lengthier and more difficult. \u00a0Also, by taking the lead, the smaller or early-stage life science company can specify the terms and parameters crucial to them, as well as define how detailed the term sheet will be before moving to contract negotiations. \u00a0Moreover, the smaller or early-stage life science company establishes the timeline for the next step, potentially taking control of the process.<\/p>\n

Non-disclosure or Confidentiality Agreements<\/h2>\n

After the initial due diligence and the preparatory steps are completed, and the prospective transaction partner has indicated interest, but before any<\/em><\/strong> substantive business disclosures and discussions begin, the parties must negotiate and execute an NDA or CDA.<\/p>\n

A good NDA or CDA will contain a provision exempting from confidentiality any information provided by the transaction partner that was already known to the life science company before executing the agreement. \u00a0It will also contain a provision that such exempted information can be evidenced by written documentation. \u00a0As discussed above, the filing of provisional patent applications before negotiations can help satisfy this criterion.<\/p>\n

Larger transaction partners commonly insist that the smaller or early-stage life science company use \u201ctheir standard\u201d NDA or CDA. \u00a0This is the time to be careful! \u00a0These NDAs or CDAs are binding contracts. \u00a0A prudent life science company will reject the notion that these agreements are easily invalidated in a legal proceeding, because (a) they are not; (b) litigation is expensive; (c) litigation takes significant time and other resources; and (d) this kind of litigation inflicts an emotional burden that small or early-stage life science companies can ill afford.<\/p>\n

In summary, risk and opportunity are two sides of the same coin. \u00a0Although business transactions have an inherent risk of failure, strategic planning can mitigate risks to acceptable levels.<\/p>\n

References:<\/h2>\n

[1]<\/a> A patent landscape is an analysis of patent data that reveals business, scientific and technological trends. Landscape reports typically focus on a single industry, technology, or geographic region. Additional information on creating and using patent landscapes is available in the following sources:<\/p>\n

Bubela, T., et al<\/em>., (2013). \u201cPatent landscaping for life sciences innovation: Toward consistent and transparent practices<\/em>.\u201d Nature Biotechnology, 31(3): 202-207.<\/p>\n

Intellectual Property Office. (2015). \u201cThe Patent Guide – A Handbook on How to Analyse and Interpret Patent Data<\/em>.\u201d Newport, UK: Intellectual Property Office.<\/p>\n

Trippe, A. J. (2015). \u201cGuidelines for Preparing Patent Landscape Reports<\/em>.\u201d Geneva: World Intellectual Property Organization.<\/p>\n

V.K. Singh (2019). \u201cPatent Analysis, Mapping, and Visualization Tools<\/em>.\u201d https:\/\/wiki.piug.org\/display\/PIUG\/Patent+Analysis%2C+Mapping%2C+and+Visualization+Tools.<\/p>\n

[2]<\/a> http:\/\/patft.uspto.gov<\/p>\n

[3]<\/a> https:\/\/worldwide.espacenet.com<\/p>\n

[4]<\/a> SIGA Techs. Inc. v. PharmAthene, Inc.<\/em>, 67 A.3d 330 (Del. 2013) [SIGA I]. \u00a0The Delaware Supreme Court found that SIGA in bad faith breached its contractual obligation to negotiate a license agreement consistent with the parties\u2019 license agreement term sheet.<\/p>\n

[5]<\/a> Contrast the result of the SIGA I decision with the New York case of Prospect St. Ventures v. Eclipsys Solutions<\/em>, 800 N.Y. Supp. 2d 131 (N.Y.A.D. 2005), where a letter agreement was found to be an unenforceable \u201cagreement to agree\u201d because it included a clear expression of intention not to be bound until both parties sign \u201ca definitive agreement satisfactory in form and substance to both sides.\u201d Id<\/em>. at 213. \u00a0In this case, the court found no obligation to negotiate in good faith because of the written expression of intent not to be bound. \u00a0See also R. G. Group, Inc. v. Horn & Hardart Company, <\/em>751 F.2d. 69 (2d Cir. 1984), where there was a clear understanding between the parties that they intended to be bound only by a written agreement when no agreement was ever signed.<\/p>\n

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As discussed in Part I, a company’s technology must have strong intellectual property to establish a significant technology transfer program or prepare for an eventual acquisition. Establishing an intelligent IP strategy can place a smaller and early-stage life science company in a…<\/p>\n","protected":false},"author":7,"featured_media":387,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[20,157],"tags":[84,163],"class_list":["post-520","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-intellectual-property","category-life-science","tag-intellectual-property","tag-life-sciences"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/posts\/520","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/users\/7"}],"replies":[{"embeddable":true,"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/comments?post=520"}],"version-history":[{"count":0,"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/posts\/520\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/media\/387"}],"wp:attachment":[{"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/media?parent=520"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/categories?post=520"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/tags?post=520"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}