NEGOTIATING AN AGREEMENT

The goal of a partnership negotiation is for both parties to sign a Binding Agreement that precisely defines each party's future obligations and rights and specifies in great detail what happens if the partnership is dissolved. The process can take a year or more and happens in stages.

After exchanging preliminary proposals, two companies may sign a non-binding Letter of Intent (LOI), a.k.a. Agreement in Principle, saying that they will make a good-faith effort to find mutually agreeable terms on which to base a partnership. Such LOIs are of limited value because they are not legally binding (e.g. how do you prove bad-faith?). The goal of the LOI is primarily to establish that both parties are on the same page. A well-defined LOI may include highly detailed terms that need only be legally codified by attorneys before the document can be called a Binding Agreement. Until the Binding Agreement is signed, either party can change its terms, regardless whether an LOI has been signed.

Sometimes, the buyer is not confident about the merits of the seller's drug candidate and may want to test a sample of the compound before making a final decision. However, the buyer may not want to risk someone else licensing the drug candidate during the evaluation period. One solution is to negotiate a Binding Agreement right from the start stating that, if the buyer loses interest in the candidate (i.e. does not advance the candidate into further development by a certain date), the license may be terminated and right to the compound returned to the seller. The onus is then on the seller to be proactive about terminating the agreement.

An alternative is to give the prospective buyer a sample of the drug candidate for evaluation and the option of signing a binding agreement within a certain period of time. If the buyer likes the compound, the buyer will exercise the option and sign a binding agreement. The burden is on the buyer to be proactive about securing rights to the drug candidate. If the buyer loses interest for any reason during the evaluation period, the buyer can simply let the option expire and implicitly relinquish claim to licensing the drug candidate. Until the option expires, the seller may not license the candidate to anyone else. Therefore, the seller may demand compensation for the opportunity cost of waiting for the buyer to make a decision.

If you are on the buy-side, you can negotiate for an option from a stronger position if the seller does not yet know how valuable the drug candidate is to you. If you wait until after the evaluation to finalize a binding licensing agreement, the seller will then know that you consider the candidate valuable and will try to drive a harder bargain. Therefore, it is important for the buyer to try to predefine the terms of the Binding Agreement before taking an option. The pre-defined Binding Agreement should be included as an appendix to the Option Agreement.

Conversely, it benefits the seller to try to defer negotiation of the Binding Agreement until the buyer expresses a desire to exercise the option.

The final Binding Agreement can be an extremely thick document. It must delineate which partner has control in certain circumstances, how decisions are made, and each partner's recourse in the event of disagreement or breach of contract. It is especially critical to define the consequences to each party of terminating the agreement. Any contingency omitted from the Binding Agreement creates potential for dispute. Leaving dispute resolution to the courts is a losing proposition for both parties.

The Binding Agreement may have built-in options allowing parties to defer certain decisions until later. For example, a pharmaceutical company may agree to fund a biotech company's development of three cancer compounds through Phase II trials. Upon completion of a Phase II trial, the pharmaceutical company will have two months to exercise an option to license each candidate on pre-defined terms. If an option expires, the biotech company may keep the compound for itself, along with all relevant data and intellectual property developed with the partner's help. Allocation of rights to data and IP must be delineated clearly in the Binding Agreement; nothing should be assumed as implicit.

EYE ON THE GOAL

Business development is just one element of a successful biotech company's business plan. Management's job is to build a profitable business; like raising capital, partnering is not an end unto itself but a step along the way.