Protecting Your Economic Interests

Transcription

1 in Protective Provisions Biotech Strategic Alliances Strategic alliances continue to be an important component of the product development and commercialization process in the life sciences industry. These transactions are highly individualized and unique, and, as such, can be used creatively by the parties to advance their particular needs and goals. Protecting Your Economic Interests by Randall B. Sunberg a partner in the Business and Finance Department at Morgan Lewis David G. Glazer an associate in the Business and Finance, Department at Morgan Lewis Irene Chiu an associate in the Business and Finance, Department at Morgan Lewis If you are a large company looking to license technology from, or collaborate with, a smaller company, one of your main objectives is to maximize your rights with respect to that technology and to protect your investment. Conversely, as the small company looking to outlicense or obtain a corporate partner for your technology, you want to maximize the consideration you receive in the shortest amount of time and preserve as many rights as possible. Because these can be polar opposite positions, it is important that each party understands the objectives of the other to create protective provisions in the strategic alliance to minimize downside while maximizing the potential upside. One of the easiest ways for a smaller company to increase the purchase price of its technology is to use an auction to create a bidding war. Auctions create competition in terms of the money the larger company is willing to pay for the technology. However, it is important that the smaller company not only look at the total upfront dollars, but also at what resources and efforts the larger company is committed to devote to the technology after it has acquired the rights. Accordingly, in addition to the absolute dollar values, the smaller company should have clear criteria and processes for selecting the larger company with which it wishes to partner its technology. In an auction, the larger company must distinguish itself from the other bidders, while at the same time ensure that it is not paying too much for the technology. The larger company should perform appropriate and adequate due diligence to minimize any surprises down the road, especially on the intellectual property and the development activities that have progressed the technology to its current state. If the large company comes across any potential issues or uncertainties about the technology, the strategic alliance agreement should be drafted with representations and conditions tailored to the specific facts. By addressing the issues through specific provisions in the agreements that account for potential eventualities rather than waiting to see if they arise, the parties can proceed with the strategic alliance. Next, the parties must agree on how to structure the financial provisions. The smaller company may want to receive most if not all of its payments upfront; but, for obvious reasons, the large company may want to pay for the technology as it is developed. There could be smaller, but more numerous, up-front payments coupled with funding of the smaller company s employees who are performing research and development work for the deal. Such smaller payments could continue to fund the smaller company and progress the technology. In exchange for the early, small payments, the large company could then pay larger milestones upon the small company achieving certain later development or technical milestones or a greater royalty or profit share percentage upon a product finally reaching the market. The small company could then, in total, receive a greater cash return while the large company 546 APBN Vol. 8 No

2 can ensure that it is only paying the greater dollar amounts after the technology has been proven. Alternatively, if the small company requires larger upfront payments, there could be protective provisions for the large company dealing with reimbursements for certain of the upfront payments if milestones are not achieved or there are delays in the development. In addition, these transactions sometimes include royalty reductions for generic competition, competitive products and required payments to third parties. Randall B. Sunberg, a partner in the Business and Finance Department at Morgan Lewis Randall B. Sunberg leads the life sciences transactions practice at Morgan Lewis, representing pharmaceutical, biotechnology and other life sciences companies in mergers and acquisitions, joint ventures, strategic alliances, collaborations and corporate partnering transactions. He graduated from New York University School of Law and Yale University. Contact Details: Randall B Sunberg Moragan, Lewis & Bockius LLP Address: 502 Carnegie Center, Princeton,NJ 08540, USA Tel: Fax: rsunberg@morganlewis.com URL: Protecting the Progress of the Collaboration As noted above, a strategic partnership between a large company and a small company may make excellent sense from both companies perspectives. In addition to both sides desiring to protect their wallets, both parties have an interest in seeing the collaboration progress, although, as is often the case, each side has a different idea as to how to accomplish such progression. A small company looking for growth may want its technology to have the opportunity to be fully developed and commercialized. On the other hand, if, as a large company looking to license technology from, or collaborate with, a smaller company, one of your main objectives in your strategic alliance is to have flexibility to match your obligations to future events and your assessments of the profit potential. Because each side has different priorities, each party should strive to understand the other party s objectives to create protective provisions in the strategic alliance to minimize the downside while maximizing the potential upside. Diligence provisions are essential in a strategic alliance agreement. These provisions serve as a guideline for the parties to act appropriately throughout the relationship. Parties diligence obligations are often benchmarked against a commercially reasonable efforts standard, which may be one customary in their industry or may be customized to a party s particular characteristics. Strategic alliance agreements also sometimes set forth timetables for targeted achievement. However, the internal and external factors that can impact these timetables need to be understood so that the parties can avoid subjecting themselves to unclear or unacceptable obligations, giving up property rights or conferring unintended advantages on others. In addition to diligence provisions, in order to keep an ongoing strategic alliance thriving, the parties should establish mechanisms for monitoring the progress of the collaboration. One mechanism for monitoring the alliance is to set up joint committees consisting of representatives from both parties to assign responsibilities to the various committees. Second, or as an alternative, each party should have the obligation to supply periodic reporting to the other side detailing its activities, achievements and future objectives. Additionally, the agreement should provide for prompt notification to the other party upon the occurrence of certain events, e.g. the achievement of milestones or adverse events. This checks and balance system will allow the parties to monitor the progress towards a prosperous strategic partnership. Next, the parties must know how to deal with potential problems to ensure continuous success throughout the collaboration. Some protective provisions addressing these sensitive subjects are usually APBN Vol. 8 No

3 David G. Glazer, an associate in the Business and Finance Department at Morgan Lewis heavily negotiated between the parties. A non-compete provision can avoid potential problems by restricting a party from competing with its strategic partner during the collaboration and potentially for a period of time after the partnership has terminated and thereby ensuring that the parties focus on the collaboration product and are not distracted by other opportunities. Restrictive clauses can prevent a company from using or disclosing, without authorization, the trade secrets it learned from its strategic partner prior to the termination of their venture. In addition, it may also be appropriate for the agreement to provide for governing tie-votes between the parties and mechanisms for casting-vote decisions. Because litigation can be time-consuming and expensive, the parties should also consider dispute resolution clauses in their agreement. By having such protective provisions, if there are disagreements requiring settlement, earlier awareness of legal ramifications can allow those disputes to be addressed before they are unnecessarily escalated. Needless to say, no one plans for failures, but what if the relationship goes sour? As remedial provisions are fundamental to any legal agreement, the applicable remedies should be addressed broadly in the strategic alliance agreement. The agreement should set forth penalties for delays and termination rights available to the parties (whether with or without cause). However, upon termination of the agreement, certain rights should remain and certain covenants should survive. For example, if termination is due to a party s breach, the non-breaching party may, rather than terminating, want to retain its licenses to the product and continue without the non-breaching party, but on different economic terms. Similarly, certain covenants such as non-compete and non-solicitation may be appropriate to survive the agreement notwithstanding termination of the alliance. Protecting Against Distractions and Disalignment We have come to understand how both large and small companies can structure an alliance to protect their wallets as well as the progress of the collaboration, but how does each party ensure that the other does not become distracted and lose interest in the collaboration? A small company may simply see the collaboration as a means to grow its capabilities and reputation and after entering into the alliance may be content to simply sit back, collect a check and dedicate its efforts to its next great idea. Conversely, a big company may see the collaboration as a strategic building block or believe that an in-house project or another outside company has a more promising product that produces the same results and thus switch its focus and resources to such other projects. It is therefore essential that the strategic alliance agreement ensure that each party remains focused on the collaboration s goals and not be distracted by items that are not core to such goals. First, by specifying the downstream rights among the parties, the collaboration can establish expectations and responsibilities for the parties and the future of the product. Depending on the nature of the collaboration, it may be appropriate for the agreement to set forth the respective manufacturing and supply responsibilities for each party. The parties may find that maintaining focus on the collaboration is best served by having the parties co-develop and co-promote the product. In such case, these rights may be fixed and linked to a profit-split financial arrangement, or may be further enhanced with conversion options into a royalty structure. 548 APBN Vol. 8 No

4 Second, the collaborative agreement should describe the lead party s roles and responsibilities. The parties should clearly identify the niche technology of the strategic alliance. The parties may want to prioritize certain indications, products or territories over others. The parties may want to define each party s responsibilities in communicating and meeting with regulatory authorities. It must also be decided which party, if applicable, is in charge of booking sales for the technology or product. Irene Chiu, an associate in the Business and Finance Department at Morgan Lewis Third, commitment is key to a successful collaboration. An avenue to ensure commitment is for the strategic alliance agreement to define a scope of exclusivity for the technology and product involved in the venture. The exclusivity can continue for so long as the research and development is ongoing or last for a definite period for the commercialization of the technology or product. While negotiating the exclusivity clause, the parties may allow exceptions for internal or third party programs keeping in mind that such other programs should not distract a party from achieving the goals of the collaboration. Fourth, if the parties authorize the use of collaboration technology outside of the venture, the parties should clearly define any limitations to be placed on such use, for example, field or territory limitations. Similarly, if collaboration technology is used outside of the collaboration, the parties could establish mechanisms for splitting any returns from the use of the collaboration technology between the parties, as well as any applicable buy-in rights. Terms for royalties or other reward sharing mechanisms in connection with such usage should also be unambiguously stated in the agreement to avoid further disagreement. Also, the parties should establish mechanisms for the sharing of information that is generated using the collaboration technology outside of the partnership. Another feature present in some collaborations is for the large company to offer a quid product to the smaller company. Because a quid product may be unrelated to the collaboration product, it may be a distraction; however, a quid product can also serve as a means to prepare the smaller company for its responsibilities in the alliance. Alternatively, the quid product may be one that is complementary to the collaboration product and fits with the smaller company s capabilities and needs. It provides the small company with a second product to promote and simultaneously puts additional resources behind the product that a large company may not have been able to dedicate. If a quid product is part of the collaboration, the parties will need to delineate the APBN Vol. 8 No

5 MORGAN LEWIS & BOCKIUS LLP LIFE SCIENCES TRANSACTIONS PRACTICE Morgan Lewis Life Sciences Transactions Practice includes clients ranging from global pharmaceutical and big biotech companies, to biopharmaceutical start-ups, specialty pharma and service organizations. We assist our clients in structuring, negotiating and implementing joint venture, strategic alliance, merger and acquisition, corporate partnering and licensing transactions to help them achieve their business goals. We also represent these companies in venture capital and public market financings, including IPOs, as well as in the equity investments that often accompany strategic transactions. Our ability to act as a resource for legal services in intellectual property, FDA regulatory, product liability, tax, antitrust, labor and employment, employee benefits and real estate matters contributes to the successful completion of these transactions in a coordinated and efficient manner. scope of rights that accompany such quid product, the mechanism for choosing the quid product, the point in time in which the smaller company obtains rights to the quid product, as well as what happens with it if the collaboration is terminated. In sum, before committing to a long-term partnership, each company should evaluate the relative benefits and strategic consequences that come along with such an arrangement. The collaborative agreement should be negotiated in detail to carry out the parties interest and true intent and to protect each party s goals and interests. The agreement should set forth particular stages of product and capabilities required, scope of rights from co-promotion to booking of sales, level of independence in the collaboration, as well as how the collaboration may be terminated if the relationship of the parties go sour. Throughout the course of heavy negotiations for a definitive agreement, both parties should remember that they need to work together over an extended period of time for their mutual benefit. Detailed terms and provisions in the collaborative agreement are a good way to protect both parties interests. However, a successful strategic alliance will require both parties to commit to the collaboration and understand the other parties goals and objectives, as well as its own. Although there are a number of common overall protective provisions to ensure a successful strategic alliance, the exact terms of such an arrangement are extremely variable. It is critical that the parties consult with their attorneys, accountants and financial advisors to carefully craft their intents into the strategic alliance agreement thus ensuring that each party is able to protect its downside while maximizing its upside. 550 APBN Vol. 8 No