In an increasingly hot biotech market, protecting IP is key

After a record year for biotech investment in 2020 — during which the industry saw $28.5 billion invested across 1,073 deals — the market for new innovations remains strong. What’s more, these innovations are increasingly coming to market by way of early-stage startups and/or their scientific founders from academia.

In 2018, for instance, U.S. campuses conducted $79 billion worth of sponsored research, much of it thanks to the federal government. That number spiked amid the pandemic and could increase even more if President Biden’s infrastructure plan, which includes $180 billion to enhance R&D efforts, passes.

Since 1996, 14,000 startups have licensed technology out of those universities, and 67% of licenses were taken by startups or small companies. Meanwhile, the median step-up from seed to Series A is now 2x — higher than all other stages, suggesting that biotech startups are continuing to attract investment at earlier stages.

For biotech startups and their founders, these headwinds signal immense promise. But initial funding is only one part of a long journey that (ideally) ends with bringing a product to market. Along the way, founders will need to procure additional investments, develop strategic partnerships and stave off competition. All of which starts by protecting the fundamental asset of any biotech company: its intellectual property.

Here are three key considerations for startups and founders as they get started.

Start with an option agreement

Most early-stage biotechnology starts in a university lab. Then, a disclosure is made with the university’s tech transfer office and a patent is filed with the hopes that the product can be taken out into the market (by, for instance, a new startup). More often than not, the vehicle to do this is a licensing agreement.

A licensing agreement is important because it shows investors the company has exclusive access to the technology in question. This in turn allows them to attract the investments required to truly grow the company: hire a team, build strategic partnerships and conduct additional studies.

But that doesn’t mean jumping right to a full-blown licensing agreement is the best way to start. An option agreement is often the better move.

“A license is very specific about commercial milestones and timelines and financial metrics, which can be burdensome for early-stage founders,” said Lisa Dhar, Ph.D., director of new business ventures for engineering at Northwestern University, during a recent webinar. “With a six- or 12-month option, the founder can maintain the exclusivity of that IP during that specific time period, during which time they can test it with the market.”

An option agreement won’t include a typical term sheet or royalty rate specifics; it tends to simply include a general description of the to-be-negotiated license. That said, there’s ample flexibility. For instance, some investors may want to see a term sheet included, or some loose ranges for financial metrics.

Paul Bertin, whose company Grove Biopharma leveraged an option agreement to procure $5 million in seed funding, said, “It was critical because it shows the marketplace you have the access to technology and are in a position to negotiate a license.”

Negotiate a licensing agreement

When you’re ready to sign a licensing agreement, it’s critical to keep in mind that its structure can have significant downstream implications. The goal is to have an agreement that partners down the road can look at and say, “We’ll invest in you.”

For that reason, the discussion should take place within the context of what sophisticated investors want (hence the benefits of testing the market with an option agreement). “The worst thing to do is negotiate a set of financial terms without visibility into what the market is ready to bear,” Dhar said.

Despite sitting across the table from one another, university tech transfer offices are really allies in this process. They know, for instance, that to successfully move the technology out of the university, it needs to be attractive to future partners. They’re also familiar with standard royalty rates and typically offer metrics that don’t change much from one university to the other.

There are, however, a few areas of concern that founders should be aware of. Outstanding rights or rights that aren’t part of the license, which can strip the license of its exclusivity, can be one sticking point. Finding the right balance with regard to combination products and royalty stacking might be another.

“You want the right flexibility to allow your product to be combined with others and, at the same time, not have that royalty burden be so untenable for financial success,” explained Bertin.

Establish your IP strategy early

Decisions about protecting your company’s IP can’t wait — founders must start aligning their IP and company strategies as soon as possible, even during the formation of the company itself. Not doing so can lead to economic and operational problems down the line.

For instance, founders have to understand early on how broadly they may want to file their IP across various jurisdictions. Which countries are worth filing in given the company’s overall business goals? For university-owned IP, the company must communicate with the university to implement a global strategy. Not making these decisions from the jump can have financial consequences (because filing patents abroad is expensive) as well as competitive ones (because of potential infringement issues).

IP strategy is also technical: Founders should consider how they want their IP portfolio to be structured. Platform IP that could be amenable to multiple downstream licensing partners should be treated differently from IP specific to a lead molecule/compound, which may be more suited for an exclusive license with a particular partner.

Breadth of claim scope is another consideration. A single patent application might be split up into multiple applications that cover different aspects of the technology. Maybe one entails a broad claim around a group of similar compounds, and in that same patent family other applications would drill down on specific molecules or methods of use.

While doing this might be difficult in some jurisdictions, the U.S. generally welcomes breaking things up this way. Having a breadth of claims from narrow to broad can give companies a comprehensive wall of protection that can keep competitors out of the market.

Again, though, this process has to start early. You don’t want to roll everything up together in one patent and then figure out how to pick it apart later to form future partnerships or stave off competition.

With the market favoring early-stage biotech, there’s no better time to be an innovator. Coming up with the technology, though, is only half the battle. Founders also have to protect it and use it strategically to bring on the right partners to help make sense of it as it goes to market.

In this exciting moment, it can be tempting to rush headlong into things without taking in the long-term, big-picture view about your company’s IP. Remember that when it comes to protecting IP, early and consistent communication with investors, tech transfer offices and advisers can make all the difference.

Startup Law A to Z: Intellectual Property