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Tech Transfers in the Lifecycle of a Pre-Sales Revenue Biotechnology Venture Destined for IPO Success

Insight Mark H. Mirkin Mark H. Mirkin · February 19, 2014

Many biotech ventures begin life as an invention conceived by a scientist/professor working in a laboratory at a federally-funded university or scientific institute. The intellectual property underlying such inventions is owned by the academic institution, a potentially valuable asset to be nurtured. Since enactment of the Bayh-Dole Act in 1980, academic institutions through their technology transfer offices have assumed responsibility for dissemination of the results of scientific research to benefit the public, a welcomed consequence of which has been the generation of income to such institutions in the form of fees, royalty payments and equity interests from out-licensing inventions to biotech ventures – startups often led by the inventors – dedicated to financing and launching companies to carry-out the commercialization effort. Exclusive licenses structured in a manner that encourages technology development and use have become the standard in tech transfer. Objective, time-limited performance milestones are contractually set, with termination, non-exclusivity or mandatory sublicensing as the penalty for breach of the financing or diligence obligation.

When a development in a federally-funded science lab appears to the inventor to have commercial potential, he/she is trained to disclose the invention to the institution’s tech transfer office, including the names of all parties involved in the invention, funding sources for the research that led to the invention, publications or public descriptions of the invention, and commercial contacts in the field of the invention. Disclosure to the tech transfer office works best when it precedes public disclosure because once public disclosure occurs patent protection in foreign countries is eliminated as a possibility and the timeframe for filing for patent protection in the U.S. is curtailed.

A tech transfer office will consider such invention disclosures for patentability and marketability. Positive positions on both could trigger the patenting process, which often culminates in a provisional patent application filing (a future article in this series will explain the patenting process). With the filing done, the academic institution markets the technology to the private sector.

The most common commercialization path is to out-license the intellectual property – both patent rights and know-how -- in return for consideration to the institution. Consideration in the forms of license fees, equity interests in the startup venture, and later royalties from sales are often shared with the inventor(s) according to the institution’s policies and employment contracts. Additionally, licensing could also result in sponsored research funding; when the inventors are principals of the licensee, it is common to have their startup fund their ongoing research at the institution. The institution often retains the right to use the licensed intellectual property for its own non-commercial educational, teaching, research and clinical purposes. On occasion, the institution will be able to designate someone to be an observer of the venture, entitled to the disclosures and access granted to directors of the company but not the right to vote as a director. With the licensing agreement in place, the new venture assumes responsibility for the patenting process, including the duty to discover and halt infringement and recover damages.

A Material Transfer Agreement often coincides with a Licensing Agreement, addressing the delivery of research materials and biological materials or associated data and know-how from the academic institution to the licensee, spanning from items such viruses, cells and organisms to substances created by the licensee which constitute an expression product such as proteins expressed by DNA or RNA. Materials often remain the property of the institution while being used by the licensee for research and development. Modifications and substances resulting from the licensees’ use of the materials belong to the licensee.

Sometimes, a licensee with broad patent rights will have the opportunity to out-license a subset of its rights for development by another biotech company or pharmaceutical company for applications out-side the licensee’s field of application. This happens frequently with therapeutics. Such sublicensing positions the academic institution to expand its royalties base, because most license agreements extend the royalties provisions to product sales by sublicensees. Simultaneously, sublicensing provides the licensee with the potential to derive income from the sublicensee. For its part the sublicensee is provided with the intellectual property it needs to carry on its mission, while the public benefits from the chance that additional drugs will result from the sublicense, not to mention the jobs and benefits reven-ues from expanding the tax base. Other sublicense opportunities arise when the licensee relies on another party to participate in the licensee’s commercialization mission, such as a manufacturing license enabling a sublicensee to manufacture products developed by the licensee. In either event, in the tech transfer setting great care must be taken to ensure that each sublicense falls within the purview of the primary license running from the academic institution to the licensee.