You may be a physician-entrepreneur with a novel concept for development, requiring you to acquire a license to use a technology from another company that enables you to produce your own product. Or you may be the owner of the intellectual property and there is a partner seeking to license the technology from you. In this installment of our column, we’ll take the opportunity to review a few considerations related to the terms of early licensing deals that have come across our desks recently. We feel these are worthy of review as example case studies for the early-stage entrepreneur/scientist. This is certainly not an exhaustive review of license deal terms, but there are some key lessons which frequently arise specifically around field of use and patent costs.
The “field of use” is a defined scope, restriction or purpose placed around the use of a license. One of the key attractive elements of development in ophthalmology from a drug perspective is the use, generally speaking, of local therapy. That includes such things as eyedrops, injections, implants and sustained-release drugs that are placed directly in, on or around the eye for local delivery, in contrast to systemic delivery routes such as oral or subcutaneous injections, which can be used for multiple diseases. This gives rise to specific intellectual property around the ophthalmic product and unique considerations regarding formulation and delivery. Thus, for many products with local ocular administration, a license deal is often specific to the niche of treating ocular disease only.
In the case of an entity looking to license and focus development on specific rights for the eye, the licensor (the one providing the technology) retains rights for areas outside the eye. The licensor may hold back these rights because it’s actively developing the drug in other areas; or there may be no actual active development, but it wishes to retain those rights to recognize future value. This will impact how the licensor values the retained rights outside the eye, and if it’s willing to license the broad rights or just the ophthalmic rights. If you’re on the side licensing the technology for your use (licensee), you need to balance the “ideal” scenario of having full rights—if the added price is worth the broad rights—or if you’re set up to move forward outside the eye to satisfy development requirements that the licensor may place on you. Recognize that, often, the “ideal” scenario desired by the pharma company you hope to license your product to in the future is to fully control the asset. This is true for a couple of reasons: First, they don’t want to see a separate pharma company developing the drug for other purposes in other dosage forms that may generate important safety data impacting the ophthalmic product; and, second, they want to control the off-label use of non-ocular products at other companies.
On the other hand, if you’re the licensor, and your potential partner is looking for broad rights, it’s important to assess the potential value outside the eye and seek a commitment that the licensee will at least use “commercially reasonable efforts” to recognize value outside the lead ocular field. This can be done with terms that require the licensee to reach certain milestones at specific timepoints; otherwise rights will revert to you, or you’ll receive a minimum payment from them as compensation.
Often, especially with platform-delivery technologies, the field of use may be defined around a specific location (e.g., retina vs anterior segment), delivery method (e.g., topical vs. injection), disease, drug or drug class. There are many ways to combine these to define a specific field of use. If you’re the licensee, the key is balancing how much you may need to pay up front in order to have a sufficient circle of protection around your lead product, and to be in synch with what you’ll commit to for the licensor if they ask for certain commitments for specific development milestones.
From the licensor perspective, the product has unrealized value that they don’t want locked up if it doesn’t move forward. You also want to account for situations in which you switch tracks, develop an add-on indication or have investors that desire a certain field of use. All of this needs to be considered when defining the field of use early in the program, especially if it’s relatively narrow and focused on a specific formulation or indication for the eye. In many cases, a company may initially intend to develop a product for a specific ocular location, such as the retina, but then, during the fundraising stage, realize there may be added value if a shorter anterior segment program precedes the retina work. Thus, you don’t want to limit yourself with a very specific field of use.
The discussion of field of use ties in closely with coverage of patent expenses. There are multiple ways to cover filing fees, prosecution costs, maintenance fees and international registrations. Sometimes these costs are covered by the licensor, other times by the licensee. If a compound is being licensed for a specific field in ophthalmology, the licensor may request that all patent expenses be reimbursed, even though the licensee doesn’t have rights outside the eye. Naturally, for the licensee the ideal scenario is to limit the patent costs around its field but, for the licensor, the ideal situation (especially if it doesn’t have other funded partners at the time) is to get as much of the total patents costs covered as possible. As a licensee, if the licensor requests payment of expenses across the broad patent portfolio, you may be able to get partners to help cover these costs so you don’t carry the full burden yourself. You might come across specific deal structure templates, particularly in the university setting, that have limited flexibility in some areas. This is an area to think about early in the process so there are no surprises later in the deal discussion based on assumptions of how costs were going to be paid.
If you are the licensee, though, also consider how you’re enabling the licensor’s technology. Is your work the lead indication for the technology, and will the licensor be able to then show it as proof-of-concept and benefit from it in other areas? In this case, see if you can also benefit from the additional income they receive that was made possible by your work, or how you can split the patent costs. The cross-licensing of new intellectual property, often times called “improvements” in contracts, is another complex topic and takes multiple forms.
The key, however, is to think through not only what happens to the IP being licensed and how costs are covered, but also what happens to the newly formed IP—whether it’s generated by you, your partner, jointly or from third-party partners—and how each entity benefits and is able to leverage it in its respective fields or territories. At the end of the day, the licensor benefits from seeing the technology rolled out in a value-maximizing manner across indications and territories, and in the case in which there are different licensees in different countries, each licensor may benefit from the other, from such things as improvements in a drug’s formulation.
As a final note, remember to ensure that the patents being licensed cover the ultimate product, and decide which parts of the licensable intellectual property you need. This may seem obvious, but in some disciplines, especially ophthalmology, in addition to the compound itself there’s often formulation IP, delivery IP, manufacturing process IP and method-of-use IP; and formulations may be optimized or modified through the development process. Because of this, make sure your business plan includes the possession of solid IP that covers where you’re headed with the product and what you’re willing to pay for it.
Whether you’re the inventor, and fortunate to have the opportunity to license out your technology for development, or you’re a licensee who will license-in a technology to develop yourself, we hope some of the above discussion is useful, sparks discussion and informs your thought process as you refine the details of your deal structure. While some of these suggestions are common sense, as the momentum of a deal accelerates, it’s easy to lose sight of the key aspects of field of use and how it impacts your program, your partners and your overall deal terms.
Mr. Chapin is a senior vice president of corporate development and the asset development & partnering group at Ora, which offers drug, biologic and device consulting; clinical research assistance and development strategy; and support in an effort to promote new client and partner initiatives. Review and comments on this column were provided by Aron Shapiro, also a senior vice president in the corporate development group at Ora Inc. The author welcomes your comments or questions regarding product development.