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IP Bits is an irregular newsletter that we send to subscribers. We aim to have 4 to 6 issues per year. Subscription is free. See all issues of IP Bits.

Sometimes its Better not to Negotiate #3



In an earlier issue of IP Bits we looked at strategies that are alternatives to negotiating. Alternative #1 was Making the Other Party Better Informed, and Timing. In a later issue we looked at Alternative #2: Guiding the other party to make meaningful proposals.


Alternative #3: Deferring the negotiation to a time of your choosing 


Why would you want to defer a negotiation? Don’t we want to get on with it?


Well, it depends. If we’re ready to negotiate then yes, we do want to get on with it. It sometimes takes so long why would we want to defer the negotiation?


But, are we really ready to negotiate? Sometimes parties prematurely start a negotiation before they really are ready.


A company that has entered into a Material Transfer Agreement to assess biological material as part of its due diligence will not start to negotiate until its ready, that is, until it has completed its assessment of the material and the IP.


Similarly, a licensor needs to consider if it is in fact ready in all respects to start to negotiate.


I recall an occasion when a licensor sought to license a technology for a nano material that encapsulated a drug, and which deteriorated in the body at varying rates. As the nano material deteriorated the drug was released into the body. By having nano material with different rates of deterioration over a 24 hour period, a drug could be released into the body continuously over that 24 hour period. As the nano material deteriorated it was not absorbed by the body but passed out as waste. This slow release nano material could be used to deliver pain relief drugs, and other drugs as well.


Was there anything for the licensor to prepare before starting the negotiation for a license of this technology? Indeed there was.


Firstly, the licensor needed to know what the regulatory pathway would be. If the pain relief drug was already on the market, and in fact off patent, with well understood efficacy, side effects, and dosages, would regulators require the nano material encapsulating such a drug to undergo the usual full spectrum of clinical trials? If so, the clinical pathway would be expensive, and the technology to be licensed would be assessed at being at a pre-clinical stage. This would dictate that its value was at the lower end of spectrum, and correspondingly that the royalties and other financial terms that it deserved be assessed at that lower end of spectrum.


Secondly, and more importantly, how did the prospective licensee assess these matters? Independently of how regulators assessed these matters, it was just as important to know how the licensee assessed them. Did it assess the technology as being at an infant pre-clinical stage? Or did it is assess the technology differently, knowing that the drug had well understood efficacy, side effects, and dosages, so that only the nano material needed to be subject to trials, and these could be smaller and faster trials. If the latter was the case the technology would travel a faster and significantly less expensive clinical pathway. In turn, it would be assessed as more mature than a pre-clinical technology, having a value greater than a pre-clinical technology, and corresponding commanding greater royalties and other financial terms.


The licensee was a large US biotech company. At the first phone conference after its assessment of the material, it asked: “What royalty rate were you folks thinking about?”


It wanted to start the negotiation. But we were not ready. We needed to know if they were on the same page as us in relation to the technology’s clinical pathway. Would it regard it as pre-clinical and attach to it a pre-clinical value, with modest royalties and other financial terms? Or would it regard the technology as closer to a market, with a less expensive and faster clinical pathway, therefore a higher value, with correspondingly more generous royalties and financial terms?


Before starting the negotiation we needed to know what the licensee thought about this. If its view differed to ours, then the discussion to proceed needed to be about the clinical pathway, not a discussion about royalty rates. We needed to be on the same page about the regulatory pathway.


There was another matter about which we needed to collect information from the licensee. While it was a successful company with sales capability in the US, we were less certain about its sales capability in Europe, Asia and other parts of the world. We anticipated it might not have that capability, and this had implications for its expectations about a worldwide license, and how we would deal with that.


We anticipated the question “What royalty rate were you folks thinking about?” and had decided on a strategy: to defer the negotiation.


We responded: “We don’t have a sign-off yet to have a discussion about financial terms. We need to finish a briefing document before we can get that sign-off. There’s a few things you could help us with to get that briefing document finished. I’ll go through everything that we think you might be able to help us with and send you an email later today.”


The licensee pressed for a response to its question. We deflected by referring back to the email that would be sent later in the day.


The email that was sent said:


The management team requires that I assemble a briefing document before it can sign off on financial terms that I can afterwards suggest.


Can you help me with that briefing document by helping me understand:


  1. Scope of remaining research to be undertaken by you and us respectively

  2. Timeframes for the above

  3. Anticipated clinical pathway (are phase I, II, and III trials all required, or might regulators be relaxed and allow phase I or II to be short trials, or even jump straight to a later phase of trials)

  4. Your proposed marketing roll out

  5. Will you be partnering with companies in Europe and Asia?


Numbers 3 and 5 asked for the critical information that we needed.


Number 3 would tell us whether we needed a discussion about the clinical pathway, to make sure we were all on the same page, before any discussion of financial terms could meaningfully take place.


For our late stage technology, where diligence obligations upon the licensee should be able to be successfully negotiated, numbers 4 and 5 would help us formulate those diligence obligations, and how far they could reasonably go.


It was simply premature to start negotiating financial terms.


Information needed to be collected from the licensee to make us better equipped to negotiate.


Our task was therefore to defer the negotiation to a time of our choosing, instead of starting to negotiate when the licensee wanted. We needed to defer the negotiation until we had assessed that we were ready to start to negotiate.



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