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 more solid position for future negotiations with larger life science or financial companies. However, several additional steps, discussed below, can further strengthen the smaller or early-stage company’s position to close a transaction effectively.
Internal Due Diligence
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. The 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.
The internal due diligence should confirm that the company’s research and development candidates and any commercial products are covered by the company’s patents or patent applications. The internal due diligence should also assess the scope and strength of the patent coverage. The extent and scope of the internal due diligence should estimate and match the rigor of a future external due diligence. A 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. Skipping a robust internal due diligence can be embarrassing. It can also result in significant delays during negotiations, thus eroding the confidence of the other party, adversely affecting the valuation of the company’s IP assets, or possibly terminating negotiations.
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’s IP in the resulting transaction agreement.
An internal due diligence should, at a minimum, identify and list the life science company’s patents and patent applications, as well as identifying inventions that should become the subject of patent applications. The 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. The 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. This stage is also a good time to at least begin to assess the strengths and vulnerabilities of the company’s patent portfolio. Any gaps in coverage can be tightened up by additional patent filings. The company should also review its other business consideration and file or perfect any needed trademark applications or other forms of IP registrations.
Identifying Potential Transaction Partners
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. Several technology platforms and databases are available for the patent landscape analyses required for this purpose. The potential transaction partners’ 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 and the European Patent Office Espacenet database.
Then, the scope of protection provided by the life science company’s own IP assets must be assessed to learn how a transaction could provide synergies. This assessment should verify the “exploitability” of your company’s IP assets from the perspective of the potential transaction partner. To do this, the company conducts a non-infringement investigation on its own patent portfolio, again from the perspective of the potential transaction partner. If the potential transaction partner can design around your IP, then the transaction partner is unlikely to spend much capital to obtain these rights. By 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.
The purpose of any due diligence is to test the underlying business and IP assumptions in anticipated deal situations. The due diligence must assess how the IP reality corresponds with the rationale for the deal. The company should conduct any IP due diligence with that end in mind. If 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 approaching the transaction partner. Such a provisional application can establish that the life science company had an earlier conception of the combination. This 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.
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. The 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.
An important early step in a successful transaction process is handling the term sheet. Term sheets are common and expected before negotiations between startup companies (in any field) and their prospective transaction partners. A 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. The term sheet sets the expectations for the negotiations of the eventual agreement. Significant deviations from these expectations are usually resisted, barring some material issues discovered during the formal diligence process.
Accordingly, a small or early-stage life science company must be well prepared and must have a good understanding of the value of their assets and contributions to be incorporated in the agreement. It must have a good understanding of the value or consideration that it expects from the transaction. The 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. Such information could be particularly useful in countering unreasonable positions that the prospective transaction partner might take during negotiations.
A term sheet usually is and should be a non-binding agreement. However, some life science companies later learn to their disappointment that their term sheet and subsequent behavior are interpreted as binding promises., A prudent life science company will obtain legal advice to avoid this outcome.
A good term sheet will describe the important terms of the agreement to be negotiated. The parties to the agreement are named. The fundamental economic terms are set out, but not with finality or even clarity. Terms relating to each party’s level of control in the agreement are also set out. Term sheets often outline the steps to be taken by each party before the definitive agreement.
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. The 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.
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. The smaller or early-stage company should provide the first draft, because it can advantageously set the stage for the rest of the negotiations. When 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. Also, 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. Moreover, the smaller or early-stage life science company establishes the timeline for the next step, potentially taking control of the process.
Non-disclosure or Confidentiality Agreements
After the initial due diligence and the preparatory steps are completed, and the prospective transaction partner has indicated interest, but before any substantive business disclosures and discussions begin, the parties must negotiate and execute an NDA or CDA.
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. It will also contain a provision that such exempted information can be evidenced by written documentation. As discussed above, the filing of provisional patent applications before negotiations can help satisfy this criterion.
Larger transaction partners commonly insist that the smaller or early-stage life science company use “their standard” NDA or CDA. This is the time to be careful! These NDAs or CDAs are binding contracts. A 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.
In summary, risk and opportunity are two sides of the same coin. Although business transactions have an inherent risk of failure, strategic planning can mitigate risks to acceptable levels.
 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:
Bubela, T., et al., (2013). “Patent landscaping for life sciences innovation: Toward consistent and transparent practices.” Nature Biotechnology, 31(3): 202-207.
Intellectual Property Office. (2015). “The Patent Guide – A Handbook on How to Analyse and Interpret Patent Data.” Newport, UK: Intellectual Property Office.
Trippe, A. J. (2015). “Guidelines for Preparing Patent Landscape Reports.” Geneva: World Intellectual Property Organization.
V.K. Singh (2019). “Patent Analysis, Mapping, and Visualization Tools.” https://wiki.piug.org/display/PIUG/Patent+Analysis%2C+Mapping%2C+and+Visualization+Tools.
 SIGA Techs. Inc. v. PharmAthene, Inc., 67 A.3d 330 (Del. 2013) [SIGA I]. The Delaware Supreme Court found that SIGA in bad faith breached its contractual obligation to negotiate a license agreement consistent with the parties’ license agreement term sheet.
 Contrast the result of the SIGA I decision with the New York case of Prospect St. Ventures v. Eclipsys Solutions, 800 N.Y.Supp.2d 131 (N.Y.A.D. 2005), where a letter agreement was found to be an unenforceable “agreement to agree” because it included a clear expression of intention not to be bound until both parties sign “a definitive agreement satisfactory in form and substance to both sides.” Id. at 213. In this case, the court found no obligation to negotiate in good faith because of the written expression of intent not to be bound. See also R. G. Group, Inc. v. Horn & Hardart Company, 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.