Stop, Collaborate and Listen (to Four Things About Collaboration Agreements)

A key part of the life sciences ecosystem, collaboration agreements help make expensive innovation possible. When they’re well-drafted, they can help collaborating parties pool their resources to more efficiently turn ideas into products. When they’re not, they can lead to disputes and slow things down. Thinking through the issues explained below should help make sure your next collaboration agreement helps rather than hurts.

Some context first. What’s a collaboration agreement? A collaboration agreement can come in many shapes and sizes, but in what’s probably the normal case, it’s an agreement in which parties (usually two) contractually agree to share responsibilities for and the benefits of a product or technology. They may do that by dividing up responsibility for developing, manufacturing, or commercializing a product or technology. In what’s again a common case, one party may be responsible for developing a product (e.g., conducting clinical and non-clinical research and obtaining necessary marketing approvals from the Food and Drug Administration), while the other party is responsible for manufacturing and commercializing the product, once enough development is complete, under a license from the developing party. The licensee often pays royalties for licensed technology and may also pay the developing party one-time payments upon the achievement of various “milestones,” like FDA’s issuance of a marketing approval or the sale of a specified number of units of product. It’s worth noting these agreements differ from joint ventures because (among other things) the collaborating parties’ relationship is contractual and is not conducted through a newly formed entity they jointly own.

Adjust Royalties to Account for Incorrect Assumptions

Collaboration agreements commonly require the licensee to pay royalties to the developing party (also typically the licensor) based on sales of the collaboration product. The royalties help compensate the licensor for the scientific and regulatory development needed to develop the collaboration technology. They’re usually based on assumptions about the collaboration technology. For example, the licensee may agree to pay royalties at a specified royalty rate because it assumes it will have market exclusivity from FDA (e.g., orphan drug exclusivity) or exclusivity because of patents on the collaboration technology or because it assumes that the licensor is licensing all of the intellectual property necessary for it to commercialize the collaboration product.

But what if some of those assumptions are wrong? What if, after the collaboration agreement is signed, a third party approaches the licensee and shows that a license to some of its intellectual property is required for the licensee to commercialize the product? There are several ways the collaboration agreement could address the failure of these assumptions, but one key way to remedy such a failure is through a downward adjustment to the royalty rate. Licensee should be careful to identify the assumptions they used in determining the royalty terms—which may require coordination between the licensee’s business and legal teams—and to require downward royalty adjustments when they’re not.

Address the of Complexity Multi-Product Collaborations

Collaboration agreements sometimes cover the development, commercialization, or manufacture of multiple products. The products may or may not be based on the same underlying technology. Pharmaceutical companies, for instance, can and do license to a single licensee under collaboration agreements the intellectual property needed for the licensee to commercialize unrelated products that contain different active ingredients. Putting multiple collaboration products in the same agreement may save paper and seem easier to administer. But, like adding variables to a math problem, it can also make things harder and add unexpected complexity.

The collaborating parties should address this complexity in the collaboration agreement. Things to consider include: Should a party have the right to terminate the entire collaboration agreement if a breach of the agreement relates only to specified products? Should the same initial and renewal terms apply to each product? Should milestones payable for one product be impacted by a breach or other problem relating to another product? Should the scope of the licenses to the collaboration technology be the same for each product?

Make Sure Exclusivity Doesn’t Hurt You

A collaboration agreement’s backbone is often an exclusive license of the collaboration technology to the licensee. While the exclusivity may be limited to a specific territory, field of use, or time, it helps make the licensee comfortable that its investment of time, effort, and money (e.g., through an up-front payment for the license) will be worthwhile. In return for the exclusive, the licensee will typically promise to use “commercially reasonable efforts”—a term whose definition should be carefully negotiated—to commercialize the product. But what happens if the licensee finds a more attractive product in the same field, if the licensee’s performance is poor despite its best efforts or if the definition of “commercially reasonable efforts” would allow it to shelve the product (e.g., because the commercialization of a different product in its portfolio makes more economic sense in view of the exclusivity applicable to the collaboration product)?

Licensors should consider these questions and cover them in the collaboration agreement. One helpful way to address some of them is to prohibit the licensee from licensing or acquiring a product that’s competitive with the collaboration product. Another that will fit some cases is to build sales targets into the collaboration agreement and give the licensee the right to terminate the agreement or exclusivity of the license if the licensee doesn’t meet the targets. That way, if the licensee tries to shelve the product or if the licensee just isn’t performing up to expectations, the licensor can start working with a different party.

Use Committees to Manage Uncertainty and Maintain Influence

Parties may enter a collaboration agreement at a very early stage of developing a product or technology—long before a drug or device has received needed marketing authorizations or undergone clinical trials or other necessary development. When this is true, there’s significant uncertainty about how the development, commercialization, or manufacture of a product or technology may progress, making it more difficult for the collaborating parties to anticipate all outcomes and share all risks and benefits through terms in the collaboration agreement. It also makes it harder for them to ensure that they’ll have their desired level of input on the development and commercial pathways that present themselves as time passes.

How can parties manage uncertainty and maintain their influence in the face of these unknowns? They can do that partly by creating—in the collaboration agreement—a committee or committees to oversee all or specified responsibilities under the agreement. The committees function somewhat like mini boards of directors. But instead of managing strategic direction for an entire enterprise, the committees have a micro-focus on the collaboration or a part of the collaboration. For example, a joint development committee, often seen in collaboration agreements for pharmaceutical products, oversees the development of the collaboration technology. Each party will have the right to appoint representatives to the committee, which should have defined procedures for meetings, voting, deadlock resolution, and other matters. This gives them a voice in important matters and helps the relationship adapt to changing circumstances.

Conclusion

Collaboration agreements drive innovation and allow their participants to accomplish goals they couldn’t reach independently. Collaborating parties need to consider and address lots of issues in their collaboration agreement; those described above are just a handful of what they may need to cover. Carefully analyzing the above and other issues will help the parties get what they’re expecting from the collaboration.