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Tuesday, May 3, 2011

Think Ahead When You are Negotiating IP Rights

In the last few weeks, I was having discussions with a group starting a company in the healthcare field.  They are seriously negotiating the rights for technology from an institution.  I have no doubt the institution would like to work out a deal with them to create the NewCo because that is the sort of thing the institution really likes to do.  Now consider that there are two parties willing to enter into an arrangement with both trying to achieve a goal of a NewCo in the region.

So what is the problem?  The institution technology manager considers the technology as having two licensable applications; a diagnostic and a therapeutic.  The company has been considering the same two applications as separate business opportunities.  This does not sound like an issue on the surface.  But, I want to use the example to explain how a NewCo really needs to do their homework on the technology before they engage in discussion for the rights.

Having a diagnostic company focused in the healthcare space is a great business opportunity.  The development can take a 510k approval route in many cases with no clinical studies required; if the application has a like diagnostic already on the market.  In addition, the billing codes are already defined.  The diagnostic business would have the potential to allow a more rapid entry to the market place and obtain early revenues.

The therapeutic application is obviously a much more costly avenue of development.  The time to final approval would be greater than 4-5 years from bench to bedside.  Costs for development can easily exceed the $50MM just for the one product with no other costs as part of the plan.  Valuation of a diagnostic company is likely to be lower than for a therapeutic company in the same healthcare field. 

So far, the background info seems to be acceptable.  But the issue comes in exploring how to create the greatest value for both parties.  The institution believes that keeping the products and companies separate would be the best value and make it easier for each company to raise capital and develop products.

During a discussion with the company, they described a future application of the technology as having a diagnostic to detect patients to respond to the therapy.  This leads the way to a Theranostic or Personalized Medicine approach to treatment of the disease.  Such an approach had been widely touted as the wave of the future; Personalized Medicine.  The combination may be best developed in a parallel manner with both being approved as a combination product.  In addition, one could develop the diagnostic and market the product and follow behind with the combination approach.  It is even possible that revenues from an early diagnostic could aid development of the therapeutic.  And, the diagnostic would be used  to prescreen patients for the therapeutic allowing stratification to groups of high responders and higher probability of drug approval.

So, which has the greater value?  Two different companies working in their individual product areas, or one company with both products having all the rights tied down.  You can never say for certain, but if I were investing in the company, I would invest in the second one!  I believe it would have a better chance of an exit at a greater value because all the technology is on one place.  That is what I advised the NewCo to do, try to get all the IP under one company.

What do you think is the best?  I would be interested to hear your analysis of the situation.

  Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon