Spotlight: What Small and Emerging Companies Need When Entering Into Dealmaking Discussions

BioWeekSF will soon be here again — January 6-11, 2019 — the week of the J.P. Morgan Healthcare Conference and 20 other events and forums. In preparation,  the week’s premium online guide,, is sponsoring a series of viewpoints and more from leaders and professionals involved in life sciences/healthcare dealmaking.

As Chair of Foley Hoag’s Licensing & Strategic Alliances Practice, partner Hemmie Chang regularly handles high profile intellectual property matters. She has more than 20 years of experience within the biopharmaceutical, medical device, gene and cell therapy, and genomics sectors, advising both established and emerging companies on a wide variety of licensing matters, from development to marketing deals – all of which involve a broad range of intellectual property assets. Big3Bio editor Marie Daghlian sat down with her in June at BIO2018 in Boston to ask her how a good lawyer can contribute to successful dealmaking.

What does a small or emerging biotech company need to consider when they want to strike a deal with another company involving rights to assets?

I would say that there are two things, with legal the being second, that a small or emerging company will need if they don’t already have it. One is BD (business development) capability—someone who can really drill down into the competitive landscape, including the comparables, financials, and overall trends, even going back to academic research papers and what has been published, and maybe a little scouting cutting edge discoveries and  IP in  publications and published or issued patents. A company needs someone who can be dedicated to that—it does not have to be a full time employee. It could be a consultant, which might be better because the restructuring of a lot of big pharma and big biotech has created a real wealth of experience amongst even solo consultants. That, I think, is fairly fundamental. It’s hard to do a deal and presumably you have stockholders and a board that is going to hold you to account, so it’s very important to get that business/financial side buttoned down.

Although we have a very good sense of deal comparables and terms, I never purport to hold myself as the BD person. Plus a company loses credibility if it doesn’t put their people forward because, at the end of the day, I might still be in the background as a legal advisor but the day to day operation and the back and forth that culminates in the signing of a deal, or more importantly post-deal—what people are doing to make the asset a success—is really going to be the company. And the partner is figuring out who these people are, whether they are trustworthy and say what they mean and do what they say, and they want to have confidence in the team. As a lawyer, I can’t really supply that. I can be a business advisor in the background and hopefully a legal eagle, but that’s not the right dynamic. The right dynamic is a business to business, scientist to scientist relationship at the end of the day. That’s what makes the best deals, the most successful deals, measured in a number of ways, happen.

After you’ve got that team together focused on whatever deal is being proposed, the second, legal piece is actually quite important because the top-line financials can really be reduced significantly if you don’t take care of some of the downside risk. This includes things like looking at royalty or milestone reductions. If the partner is funding the deal and they ask for the Tesla of development plans but you are willing to give them maybe a Volvo, who pays the difference? Those details need to be thought through and discussed in a collegial fashion. You will fritter away the economics if you promise to deliver goods that you don’t know how to make yet, or what the components of those goods are until later.

These are things that can all be worked out but the more you lay that out ahead of time, the less fuss you have when you get to the contract because, while there are a lot of reasons, deals often go awry when some of that nitty gritty (in a cooperative, collegial fashion) aren’t put on the table in advance and discussed. In the heat of the moment when you’re getting the deal done, that’s a hard time to have these ultimately financial discussions.

The role of the legal advisor is to point out those things that can be fine-tuned or discussed in the term sheet. Of course, everybody wants to get the term sheet done and go to documentation and there are times when moving quickly is one of the most important objectives, especially for emerging companies. While we represent a lot of large pharma and biotech, we also represent many emerging companies and do a lot of work on the sell side where we can often make more of a difference if we’re there to ask, “Are there reductions on your royalties or other payments for third party licenses?” or “What happens if there is generic competition?” or “Are you getting paid for any issued patent or only for composition of matter, not method of use?”

And if you come up with something jointly in a true development deal, who gets what and who pays for what? Does the partner have to pay for the privilege of being able to use that joint IP exclusively?

Now you can get very quickly to how many angels are dancing on the head of a pin, so I don’t like to do that either. For example, even though representations, warranties, indemnifications, and legal liability limitations are essential to any deal, they are rarely spelled out in the term sheet. But they can be. It depends on whose large partner forms you are using, but often they are not. And I’d probably advocate not spelling them out. But you might consider spelling out other terms like what happens when—it’s like a prenuptial agreement—if there is a divorce or the engagement is broken off, what happens then? The innovator company may very well want to say, “I get some of that joint IP back, even on a basis where I can use it royalty free, if not exclusively.” If there were regulatory filings, the company may want those back. I understand that you, partner, invested millions of dollars in that, but I didn’t force you to terminate (particularly a termination for convenience or the partner’s material breach). And if there is data, patient data or other in vivo or in vitro studies that the partner might have done, it is sort of unfair not to give the innovator company the benefit of that when they part ways, particularly if it is a no-fault parting.

It’s a little trickier when the allegation is that the small or emerging company side has been in material breach. At that point, did it mess up enough that either the partner wants to continue the license but at reduced economics or issue some sort of penalty like getting excluded from the joint committee and decision making. It is also tricky –and not always addressed—if one side or the other in a licensing deal may be acquired or may assign and sell the assets to a competitor. There you really need to think through how to deal with the situation. I think some of the more enlightened partners will realize that this happens all the time and know that they need create an ethical wall (and larger companies can, and do, do this) so that a side that is working on a competitive program is walled off from information and talking to the other side. Law firms do this too, so it makes sense to us. But there are some people who have very strong feelings about that and truthfully, in a small company, can you really wall anything off?

Other issues include IP that the competitor might have that the partner is saying, “Hmm, that might be nice to get access to.” But it wouldn’t be fair. A company might ask, “Do they really know what our plans, what our pivot is on this particular product, our deepest dark secrets?” So there is understandable hesitancy. There are definitely sticking points that you might not get to in a term sheet, but the sooner you engage, and have it be a conscious decision about what to pursue or not pursue, and not just a “we didn’t get to it, or we didn’t think about it”, because with anything at an early stage, you’ve got to be sensitive to the dynamic—how people get along with each other, what’s the quid pro quo, what are the personalities on the other side—because not every company is going to have the same team that is dealing with the matter so you gauge, regardless of  the reputation of the partner, their working style.

Ideally, if the parties have been working closely together, at some point both sides are going to be advocates for the deal. Which is why, and rightly so, sometimes deal teams are accused of losing their objectivity. But at some point both sides are going to be advocates because once you invest that much time and presumably you are a believer and that’s why you are moving it forward, you can make the party on the other side not make silly concessions, but recognize the power of your concerns or your scientists’ concerns about the relationship.

The thing is, bringing in counsel is not a substitute. When a company enters into dealmaking discussions, it needs to lead with its science and business, and to develop relationships in a collaborative, cooperative way, which doesn’t always mean saying yes.

I have some clients that come from cultures where it is almost deemed disrespectful to negotiate a point or disagree (during discussions), so then they end up disagreeing later after a perfectly amicable conversation or you hear from a back channel that they are actually not on board with what was discussed.

So, you also need to break through those barriers and both sides need to be sensitive not just to cultural differences in terms of background and where people come from, but also to cultural differences among companies. I think it helps to focus people on the science and the business. I believe I can bring a positive attitude in helping develop and foster those relationships. begins on November 7th, with signups beginning on October 17th. Big3Bio subscribers get 50% off, contact for more information. Big3Bio is also a media partner for the upcoming BIO Investor Forum and its Info Session on 1×1 Partnering at JPM Week on October 17-18, and partners with BIO for the JPM Week events & receptions webinar in December. Stay posted to for more information.