A One-Size-Fits-All License Agreement: The Holy Grail of Tech Transfer?
Sylvia Pagán Westphal9/21/10
One common complaint I hear from biotech entrepreneurs is that negotiating a license agreement with a university can be a nightmare. There are universities—some of them within the very top echelons of academia—that are infamous for having technology transfer people who are described as very difficult to work with.
It’s not that surprising that these two factions of the life sciences ecosystem—the intellectual property generators in academia and intellectual property seekers in companies—clash over their perceived value of this key asset.
Usually, entrepreneurs and investors come to the negotiating table arguing that a discovery they seek to license, while extremely promising, is a huge bet. Patents for laboratory-based discoveries are seldom supported by exhaustive preclinical research, let alone evidence of efficacy in humans. A startup licensing IP has a lot of work to do, and hundreds of thousands of dollars to spend, before it really knows whether the discovery will lead to a drug candidate. Also quite often a patent is but one small piece of the IP arsenal a company needs to gather, so its individual value may actually be quite small, even if it is crucial that the company claim hold of it.
Universities, on the other hand, have to put in a significant amount of money financing patent applications, so they want to recoup that early on when licensing to a company. The cost to get a single US patent can be $30,000 to $60,000, says Cathy Innes, director of the Office of Technology Development at the University of North Carolina at Chapel Hill. “The university owns all the IP, so very quickly it can end up with $200,000 to $300,000 in IP costs and you’re not making money on the company yet,” she says. Aware that only a small percentage of life sciences discoveries ultimately succeed, but that those which do can become real cash cows, universities also want a good deal on royalties in the event a discovery turns into a popular drug or device.
So, as usually happens, these two factions, through their lawyers, end up spending a lot of time negotiating terms, tugging and pulling at this and that clause, with each side trying to squeeze a better deal for themselves while thinking the other side is greedy. A lot of time is wasted exchanging documents that sit with the other party for days or weeks before coming back. People who do these kinds negotiations for a living say that each and every time it feels as if they’re reinventing the tech transfer wheel, even though, for the most part, the same issues come up again and again. That can’t be too much fun.
That’s why it’s so refreshing to see Innes and her team at UNC take up the tech transfer world by storm with their newest invention: a one-size-fits-all express licensing agreement. They call it the holy grail of tech transfer, though critics, I reckon, think of it more as heresy. Either way, it’s gutsy.
The terms are non-negotiable and the licensing agreement is offered to every UNC-based startup—the company can decide to take it as is, or leave it and negotiate the old-fashioned way. The terms are not very sweet for the university: a 1 percent royalty on products requiring FDA approval following clinical studies and a 2 percent royalty on all other products. The university takesno equity in the company and no milestone fees, although in the event of a merger, stock or asset sale, or IPO, it takes a 0.75 percent payment on the company’s fair market value.
The idea of an express license agreement “had been discussed for a long time,” says venture capitalist Jean-Francois Formela, a partner at Atlas Venture. “So kudos to UNC for this.” But Innes is the first to admit she’s “getting a lot of flak” from tech transfer colleagues at other institutions. The comments she gets go along the lines of “Are you out of your mind?” and “This will never work,” she says. Her peers, she adds, “would want more” for the university, such as higher fees or royalties. “Some of my colleagues would not take less than 3 percent in running royalties,” she says.
The express license has been available at UNC since December and so far it has been used to launch six startups. Why, I asked Innes, would you take a bad deal upfront every time? She said, essentially, that the university is taking a bet on volume over margins. “Where we hope to gain is that if we get a lot of companies started, more of them will be successful and have more products on the market, so we’ll be more successful,” she said. “This university has been very consistent in its messaging [that] we’re not just trying to maximize cash. We need to get more things in the pipeline.”
I asked Lita Nelsen, director of the Technology Transfer Office at MIT—and, by many people’s accounts, one of the most respected technology transfer experts in the US—what she thought of UNC’s agreement. Let’s just say she wasn’t head-over-heels for this type of deal. “This is a massive change to what is not the hard part of the problem,” she said. “People seem to think that negotiating the agreement is the hard part of getting startups off the ground. The real issues are ones of investors, leadership and the like.”
A one-size-fits all agreement, Nelsen argues, takes away from the uniqueness of each technology. For example, terms for a license in the pharmaceutical space, where margins on future sales could be rather large, should be different from terms for an energy startup, since margins on sales of a commodity can be significantly smaller, she said. “Every deal is so different that [the express agreement] is going to cheat it at one end or the other,” said Nelsen. “It’s going to underprice sometimes and overprice other times.”
And how about the argument that the government’s investment, in the form of research grants, is being undermined if license terms don’t aim for a good return on inventions? Innes said getting a big return isn’t the government’s chief aim in giving grants. “The government does not say ‘Get the maximum dollar back into the inventor’s pocket,’” she replied. “It says, ‘Get your inventions commercialized.’”
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