Feature
Research Collaboration in Australian Biotechnology
In brief: In Part 3 of our series on research collaborations, lawyer Anne Donaldson discusses strategies to commercialise the fruits of the collaboration.
In next weeks fourth and final feature article in our series on research collaborations, lawyer Sarah Murray discusses tax implications in collaborative research.
Introduction
Where a research collaboration produces a product or products with potential commercial value, the parties will need to determine how best to exploit the technology and how to distribute any returns from the commercialisation. The commercialisation phase of a collaboration raises different issues for the parties than the research phase. These issues may be determined as part of the up-front agreement, or considered later in the project.
Strategies for commercialisation may involve one or both parties undertaking the process (in-house commercialisation), the creation of a dedicated commercialisation company (a spin-off vehicle), commercialisation through licensing the technology to some third party or simply packaging and selling off the intellectual property in a trade or share sale.
The parties also need to determine how returns from commercialisation will be distributed, who gets how much and when the amounts will become payable.
Commercialisation strategies
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In-house commercialisation
Where one party to a research collaboration venture is a commercial entity with expertise in the relevant market for the technology, it may be appropriate for that party to undertake commercialisation itself. In this situation, it is likely that the commercial party would take ownership of the intellectual property in the technology, as this would give the party a clear basis on which to enter into any negotiations and commercial deals.
In this scenario, the commercial party would usually pay royalties from the commercialisation proceeds back to the research party. Alternatively, the commercial party may pay a lump sum to acquire the technology outright.
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Spin-off vehicle
It may be that the technology does not fit within the core business of the commercial party, or it may be desirable to include both collaboration parties in the commercialisation process. In these instances a dedicated spin-off vehicle (a separate company) may be created to commercialise the technology resulting from the collaboration. The collaborating parties would take shares in the company (with or without other investors). Each party may also have directors on the board, with the commercial party having the majority of directors or deciding vote on the board at this stage of the project.
In this scenario, ownership of the intellectual property may be vested in the spin-off vehicle and the parties would receive distributions of profits through their shares in that company.
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Licensing
Licensing the technology to a third party(s) allows for a more hands-off approach to commercialisation. This may be the most desirable option where neither party has appropriate expertise in the market for the technology. It may also be a suitable option if nether party has the resources necessary to commercialise the technology to its full potential, for example to undertake extensive pre-clinical development and clinical trials, or to market and distribute the product.
In this scenario, the licensee or licensees would pay royalties back to the parties (or to the entity holding ownership of the intellectual property).
Royalty payments
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Payment triggers
Payments from the proceeds of commercialisation may take the form of lump sums or on-going royalties. A royalty is an amount paid in return for the exercise of a right to use or take something, such as the exercise of intellectual property rights in a technology. A combination may be used, for example with a lower rate of on-going royalties being accepted in return for an up-front lump sum.
Royalties payable from the proceeds of commercialisation may become due at certain time intervals or according to sales levels.
Where the commercial party has provided payments to the research party through the research phase of the project, it may be agreed that the commercial party will recoup all or a part of these costs from the commercialisation returns before any further amount becomes payable to the research party.
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Rate of payment
The rates of payments are often highly contentious and are essentially open for negotiation. At the end of the day, the rate should provide an appropriate return to the parties for their research efforts, risk and foresight whilst also providing sufficient incentive to the commercialising entity to actually exploit the opportunity.
Royalties may be paid on the quantity of items sold, or the amount of revenue raised. If paid on the revenue, the royalty may be calculated from 'gross' or 'net' figures (the percentage will be smaller if using the former) and by reference to 'sales' or 'profits'. Calculating net figures (eg net profits), however, can be contentious, as the question 'net of what' can be a question of interpretation. Therefore, this option may require that the commercialising party's books be available for inspection and auditing by the other party. For this reason, it is often more desirable to make royalties payable on the basis of gross figures, which can be determined objectively.
Minimum royalty payments or an ongoing licence fee may be set to ensure that a certain base level of return is received regardless of the success of the commercialisation. On the other hand, a sliding scale of royalties may be used, whereby the percentage payable increases when certain thresholds of sales are reached, in order that the party receiving royalties shares in any commercial success.
Conclusion
Whether a strategy for commercialisation is agreed between collaborating parties at the time of entering into a research collaboration venture, or whether it is considered later in the project, it is important to keep in mind that the issues in relation to this phase of the project will be very different from those that arise in relation to the research phase. Parties will need to decide whether one, both or neither will be actively involved in the actual commercialisation of the product and consequently with whom ownership of the intellectual property in the technology should reside. The sharing of proceeds must also be agreed. While the rates can be contentious, there are mechanisms available to take account of the success of the commercialisation and adjust the returns accordingly.
For more information, please contact Tony Pyman on +61 3 9613 8894.