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ABSTRACT

This paper shows the results of investigating what are the most common business

practices in the commercialization of discoveries and technologies in the biotechnology

sector, the allocation of control rights as a result of the negotiation process, the factors

impacting the bargaining position of the companies during the negotiations, and the

perception of risks by the business practitioners.

For this purpose, qualitative methods were applied. First, the extant theoretical literature

was reviewed as part of the secondary research and the definition of the research

framework for the primary research. Secondly, as primary research, in-depth semi-

structure interviews were conducted to eight business practitioners in the biotechnology

and pharmaceutical field to contrast the findings of previous literature with their

opinions.

Overall, the findings are that the most common commercialization strategies of small

biotech companies are licensing agreements and partnership and alliances with larger

companies especially in the pharmaceutical industry, driven first by the lack of

resources and complementarities of the small firm, and a trend of the large companies to

search outside their walls for new technologies to fill their pipelines.

In the allocation of control rights, a large company usually tries to retain the rights to

manage clinical trials, manufacture and market the product asking for exclusivity in

certain markets. The right to sublicense will be retained by the large company, while the

right to terminate contract or alliance is commonly included in the contract as a

possibility for both parties in the agreement. The owner of the technology will normally

try to partner with a company that has no intention to shelve the project. The original

owner of a technology will commonly keep the right to ownership of that technology,

whereas the ownership of subsequent developments inside an alliance will vary

depending on each case.

With respect to the bargaining power, the interviewers remarked that the financial

power of the firms, the value and level of breakthrough of the technology; the number

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of potential licensees; the pressure of patent cost; the lack of complementary assets; and

negotiation skills are some of the factors impacting the bargaining position of the firms.

Concerning the perceived risks when collaborating with other companies, the business

practitioners show concerns when one of the parties involved might potentially: shelve

the project or declare it out of strategic focus; use disclosed information to infringe,

invent around or become a potential competitor; profit in an unequal and advantageous

manner; invest without desired results. Some practices recommended to mitigate these

risks are to have well written contracts -with openness to renegotiate-, to build a strong

alliance management team and to conduct a robust due diligence by both parties

previous to sign any collaboration agreement.

As a recommendation for future research, it is suggested investigating further on the

factors influencing the selection of commercialization strategies by small biotech and

large pharmaceutical companies, and the factors affecting the bargaining power in an

negotiation.

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- '-

TABLE OF CONTENTS

INTRODUCTION ! "-Problem Statement! #-Structure of the Thesis! $-

METHODOLOGY ! %-Secondary Research! %-Primary Research! &-Limitations of the Research! '-

LITERATURE REVIEW! (-Background! (-Configuration of a New Value Chain! )-Commercialization Strategies! "#-

Business models and type of companies- 89-Collaboration forms- 8:-

Form of Transactions and their Risks! ")-Control Rights! #"-Bargaining Power! #%-

ANALISYS AND DISCUSSION OF PRIMARY FINDINGS ! #'-Commercialization Strategies! #'-

Licensing strategy- ;<-R&D partnerships and alliances- 9=-

Control Rights! $#-Right to manage clinical trials- 99-Right to process development and manufacture final product- 9>-Right to market universally- 9:-Right to market product alone (Exclusivity)- 9?-Right to sublicense- 9@-Right to terminate contract or alliance- 9@-Right to shelve the project- 9A-Right of ownership of the technology and its subsequent improvements- 9<-Right to patent litigation- >=-Right to delay publications- >8-

Bargaining Power! %"-Financial power- >;-Value and level of breakthrough of the technology- >;-Number of potential licensees- >>-Pressure of patent cost- >:-Time to market and opportunity cost- >:-Lack of complementary assets- >?-Small number of research suppliers and specialization- >@-Expertise and market knowledge (market power)- >@-Negotiation skills- >A-Final thoughts about bargaining power- >A-

Risks! %)-Risk of collaboration becoming out of strategic focus or shelve of project by the large

company- ><-Use of small firm’s disclosed information by the large company to infringe, invent around

or become a potential competitor- :=-Profitability risk- :=-Risk of project failure or investing without desired results- :8-

Strategies to Mitigate or Reduce Risks! &"-

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- ''-

Well written contracts- :8-Openness to renegotiation- :;-Alliance management- :;-Robust due diligence- :9-

CONCLUSIONS AND FURTHER RESEARCH! &(-Further Research! &)-

LIST OF REFERENCES ! '*-

APPENDICES ! '(-

TABLE OF FIGURES

Figure 1. Pharmaceutical industry value chain and the set of specialist firms. Granberg &

Stankiewicz, 2002.

Figure 2. Drug discovery process and value chain. Mehta, 2008.

Figure 3. Diagnostic commercialization value chain. Mehta, 2008.

Figure 4. Organizational modes of inter-firm cooperation and extent of

internationalization and interdependence. Narula & Hagedoorn, 1999.

Figure 5. Alliances types. Contractor & Lorange, 2002.

Figure 6. List of control rights. Lerner & Merges, 1998.

Figure 7. Position of the proof-of-concept point of inflexion in the stages of drug

development. Own creation with information provided by the interviewees.

Figure 8. Potential risks and their mitigation strategies proposed by the interviewed

business practitioners. Own creation.

9

10

15

16

18

23

28

55

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8-

INTRODUCTION

Increasingly over time, Research and Development (R&D) and innovation are pursued

in a collaborative interaction, usually in two types of innovation linkages. First, through

business-to-business interactions in the form of contracted-out R&D practices,

transactions in R&D services and technology alliances; and secondly through public-

private R&D collaborations. According to the National Science Board, it is estimated

that only in the United States in 2007, companies allocated approximately US$19

billion to R&D performed by external organizations located within the United States.

This number compared to US$12.4 billion for 2006, represents a 53 per cent increase.

The all-industries ratio of contracted-out R&D versus company-funded, company-

performed R&D increased from 5.5 per cent in 2006 to 7.8 per cent in 2007. Across

R&D-intensive industries, pharmaceuticals had the highest ratio of contracted-out R&D

with a 21 per cent ratio in 2007 (Board, 2010).

In terms of worldwide business technology alliances, according to the Science and

Engineering Indicators 2010 from the National Science Board, in year 2006 the

Cooperative Agreements and Technology Indicators (CATI) database had registered

around 900 newly formed alliances, 60 per cent of which was in the biotechnology

sector. This, in addition to the increase of R&D funding from year 2006 to 2007,

captures the importance of collaboration agreements worldwide (Board, 2010).

In the pharmaceutical industry, the pharmaceutical companies had traditionally

developed their own technologies in-house (Chandler, 2005), in a closed innovation

model (Chesbrough, 2003 & 2006). The surge of small biotech companies and the new

regulation to access discoveries made by public research centers (BayhDole25, 2006)

impacted the business model of the large corporations obligating them to rethink their

strategies (Fisken & Rutherford, 2002). The new business configuration led the small

companies to specialize on the early stages of the value chain such as the discovery and

development, while the large companies, even though participating in all the value

chain, they concentrated with more impetus in the later stages such as further

development, manufacturing and commercialization in the end market (Granberg &

Stankiewicz, 2002).

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;-

This meant that in order to complete the business cycle from the discovery to the end

market, these two type of firms necessitated to increase the level of interactivity using

collaboration strategies like licensing in and out or forming partnerships and alliances,

strategies that deal with negotiation processes to allocate control rights (Aghion &

Tirole, 2004; Lerner & Merges, 1998) influenced by the bargaining power of each party

(Argyres & Liebeskind, 1999) and the perception of risks (Helm & Kloyer, 2004).

Problem Statement

A great deal of biotechnology research providers, specially in the pharmaceutical

industry, is composed by young companies, which lack the complementary assets such

as manufacturing know-how, sales forces, distribution channels, and a strong position

on the market. This situation influences these firms to formulate their business models

primarily based on the commercialization strategies of their discoveries and inventions

with other companies by creating alliances or licensing deals. Regularly, this task

involves a complex process of negotiation between the young research firm and the

potential buyer/partner, where the bargaining power plays a vital role affecting the

strategies of the parties involved. These strategies can sometimes be reflected in the

different control rights each firm tries to retain and, or forgo. Control rights are defined

as the ability of the firm to control the way a firm or alliance is run (Edwards &

Weichenrieder, 2009). This situation leads us to the following research questions:

• What are the commercialization strategies of the research providers in the

biotechnology sector?

• Which control rights do these research providers commonly retain and, or forgo

during the negotiation process?

• Which are the main factors impacting the bargaining power of the research firms

during the negotiation process?

• What are the perceived risks by the business practitioners during the

collaboration process?

In the past 30 years, a wide variety of discussions about the allocation of control rights,

especially in the biotechnology sector, have taken place. However, currently, there is a

lack of updated qualitative research related to the analysis of commercialization

strategies implemented by research firms, their realization during the negotiation

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9-

process considering the allocation of control rights, the definition of factors impacting

the bargaining power during the negotiations and the perceived risks during the

implementation of the commercialization strategies. This research intends to fill in this

gap to demonstrate what the commercialization strategies of the research firms are and

how they become tangible in the negotiation process through the allocation of control

rights, involving the bargaining power as a catalyst on this process and the definition of

the perceived risks by the firms.

Structure of the Thesis

The paper is divided into five sections. The initial section comprises the methodology of

the research with an extended description of the employed primary and secondary

research. The primary research consists of the qualitative component made through

interviews to business practitioners on the biotech field. The secondary research

provides an overview of the secondary information from the review of extant literature

on the research topic. This section also highlights the limitations of the research

considering the aspects of reliability and validity underpinning the conclusions of the

research.

Subsequently, the third section provides a thorough review of the existing literature,

setting a framework of prior knowledge and research on the topic conforming the

conceptual foundations. For this purpose, relevant findings in previous academic and

professional literature are highlighted and reported on this section.

The fourth section will render the analysis, discussion and interpretation of the research

findings proceeding from the interviews made to business practitioners. This section

also draws parts from extant literature to support, explain or contrast the findings of the

interviews.

The last section covers the summary of findings and conclusions, as well as suggestions

for relevant further research not in the scope of work of this thesis nor found on the

previous art.

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>-

METHODOLOGY

The current thesis is constructed on qualitative research based on living experiences and

personal knowledge acquired by practitioners in real life, and gathered via interviews.

The main findings do not arrive from statistical procedures or other means of

quantification.. Also, valuable information has been collected from the review and

analysis of extant literature. The research makes use in part of the methodology of

grounded theory by Strauss and Corbin, though the purpose is not to build new theory,

but rather help elaborate and extent the existing theory, potentially offer new insights,

enhance understanding and provide a meaningful guide for further action (Strauss &

Corbin, 1998).

Foundations of the commercialization strategies of biotech firms, the control rights

commonly retained by those firms as well as the factors involved in the balance of the

bargaining power in the negotiations of such control rights are obtained from the

inductive procedures analyzing data from the interviews and the analysis of data from

the extant literature.

The first part is integrated by the secondary research, which includes the literature

review to help set the underpinning of the research. Later on, the primary qualitative

research is explained, and finally some limitations of the research are described.

Secondary Research

A thorough research on existent articles was conducted on business-specialized

databases and journals such as ScienceDirect, EBSCO, JSTOR, Scopus, Oxford

Journals, among others. Keywords like open innovation, outsourcing of technology

development, research suppliers, research agreement, negotiations, allocation of

property rights, control rights, commercialization strategies, incomplete contracts,

opportunistic behavior, hold up problem, moral hazard, royalties, specific investment,

alliances, collaboration strategies, R&D outsourcing, licensing strategies, technology

commercialization, and others were used. Special attention was given to research

articles focused on commercialization strategies of technology in the biotech sector,

control rights and bargaining power. The span of this task included the search of

published books, professional publications and websites of biotech and pharmaceutical

companies.

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:-

The information from the articles was then summarized extracting the main findings

and contributions to the literature. This task helped to construct a conceptual framework

on the field of study to be used for building the potential questions for the interviews to

business practitioners. The main findings are divided into general concepts such as

commercialization strategies, control rights, bargaining power and risks.

Primary Research

It comprises the qualitative and main substance of the research. A series of interviews

was conducted to a total of eight business practitioners specialized in the area of

biotechnology and pharmaceutical sector. Their level of experience, knowledge,

location, organization/company, and position and roles played in their organizations

diverge greatly. The interviewees include technology managers, technology specialists,

business developers, investment managers and chief executive officers (CEO’s), all of

them part of diverse organizations such as a technology transfer division, a contract

research and development company, an organization for funding biotechnology start-

ups, a consulting company for technology management in biotechnology sector, and

pharmaceutical and biomedical device companies. The purpose to have a wide diversity

among respondents was to have different perspectives on the research topic. The

sampling of potential interviewee was drawn from several directories of companies and

organizations mainly in Denmark and Mexico. Some other contacts were obtained

through references of personal connections and second-tier connections.

Approximately forty potential interviewees were contacted via e-mail explaining the

purpose of the research as well as the intention to conduct an interview. Eight people

responded, four of which were located in Denmark and interviewed in person, whereas

the other four were located in Mexico, U.S. and Sweden, and interviewed by telephone.

Additional exchange of information took place via e-mail in order to clarify insight

from their responses.

The interview was semi-structured, meaning that the basic concepts defined in the

conceptual framework were brought at the beginning of the interview through general

questions. Later on, as the interview proceeded, specific questions arose out of the

direction of the conversation, yet respecting the defined framework of themes and guide.

After each question, the interviewee was allowed to describe freely on the topic. During

the conversation, the interviewees may have elaborated on some of the topics without

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the need to specifically ask the elaborated questions. Due to the use of academic terms,

there was a need to explain and orient the interviewee for their full understanding on the

questions. Examples of this may include the explanation of the term bargaining position

and the factors affecting it positively and negatively. Practical examples using a

business context may have also been used. The information from each interview was

collected in a note-taking form and audio recorded for posterior review and analysis.

For the analysis, the information was categorized using the conceptual framework

defined in the literature review to support or contrast such findings.

Limitations of the Research

The limitations on the use of the knowledge gained through the research are to be

considered before the generalization of the results herein presented. The literature

review is built upon the analysis of the prior art bearing a load of relative validity and

reliability concerns. Also, some limitations and constraints to the quality of knowledge

gained from the secondary sources apply. For this reason, the findings of the secondary

research were triangulated with the findings from the primary research. On the other

hand, the primary research was sourced from in-depth interviews to high-level business

practitioners from different organizations. This allows minimization of reliability

problems; however they cannot be excluded fully. Each interview was made in a semi-

structure with open-ended questions in order to prevent bias questions by the

interviewer. Nevertheless, full disclosure of information may have not been shared

given confidential information. In order to minimize this issue, the interviewees were

notified that the information would be treated as confidential without quoting the

interviewees’ names or their organizations. The interviewers may still not disclose

certain information or opinions. To avoid handwritten mistakes, each interview was

audio recorded.

The validity might be also restricted upon the limited number of interviews. The non-

representative size of the sample may prevent direct generalization. Dissimilarity among

the type of companies and organizations may also affect the validity. However, due to

the small amount of extant qualitative research on the topic, this thesis represents an

opportunity to find some future research questions that has not been explored in the

extant literature.

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LITERATURE REVIEW

This section helps set up the basis of the research to answer the research questions. It

starts describing the background of the evolution of biotechnology and how some

technological changes and other factors affected the value chain of businesses in this

field. Later on, there is a description of the different commercialization strategies

implemented by small and large companies, followed by the definition of some business

models used by companies. Immediately later the collaboration forms are considered

together with the form of transactions and risks, continuing with the description of

control rights, just to finalize with the discussion of bargaining power.

Background

Research and development commercialization is one of the most crucial business

practices between start-ups and established companies. Firms around the world thrive

constantly to develop the best technologies and situate them in a better position with

respect to their competitors. The commercialization of technologies tends to be more

competitive as the number of technology-based companies is larger; such is the case of

the biotechnology sector1. The use of biotechnology has expanded at a great pace

during the last 40 years. It went from practicing biotechnology at a macro level –

breeding animals and crops for example- to working the micro level. The development

of technologies that were used by biotech practitioners allowed for a series of important

discoveries, unleashing the development of this industry in a private form. The new

companies being created allowed the exploitation of discoveries and technologies

applicable in health, agricultural, environmental and industrial applications (Strauss &

Corbin, 1998), which evolved through decades of basic research and product

development in several existing industrial sectors (U.S. Congress, 1991). During this

time, the biotechnology field has been populated with diverse types of companies,

whose business models have evolved rapidly. The immediate development of

biotechnology helped change -and is still changing- the structure of the pharmaceutical

and healthcare industry based on the rise of expenditures on R&D.

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Over the past 40 years, some pharmaceutical firms have consolidated into the market,

but also many newly competitive biotechnology firms have entered the game. The

collaboration of these two types of companies accompanied with the non-profit sector

has allowed a rapid evolution.

Up to the mid-1970’s, the companies that dominated the pharmaceutical industry came

from the old-school fashion of the chemical sector, in their majority fully-integrated

large companies with units covering all the value chain ranging from drug discovery to

clinical development, manufacturing and commercialization. Most of the drug discovery

activities were made in-house, whereas the licensing activity was driven downstream

with rights to commercialize proven products and drugs. The knowledge and

technology were frequently acquired from the academic sector through different sources

opened publicly. Whether the type of transaction was integrated or not, depended

greatly on the nature of the assets involved in the transaction (asset specificity),

uncertainty and the regularity of the transactions. In general, those transactions

conducted less frequently, involving more specific assets and having more uncertain

outcomes were more likely to be integrated (Rasmussen, 2010). According to Mowery

(1983), during the period of 1900 to 1940 the cost of organizing innovation inside the

U.S. manufacturing companies was lower than contracting with an interdependent

supplier in the market, allowing for the retention of all the residual rights in-house

(Mowery, 1983).

The subsequent waves of development in biotechnologies affected the value chain of

the health industry. During the 1980’s, there was a more complex development of the

industry with the birth of thousand of biotech ventures, many of them supported by the

non-profit sector such as the academic institutions, increasing the competition for

knowledge and new technologies. While some of the newly created biotech firms

thrived to follow the same business model of the big pharmaceutical, just a few

succeeded in doing so, and most assumed the role of specialized suppliers of leading-

edge technologies (Cockburn, 2004).

The entire new economical-business phenomenon was supported by the implementation,

in 1980, of the Bayh-Dole Act or University Patent Patent Procedure Act in the United

States, legislation regarding to intellectual property funded by the federal government.

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Response of pharmaceutical companies to biotechnology 101

to those providing platform technologies. In addition, specialist compa-nies in clinical trials (CROs), contract manufacturing (CMOs) and sales organisations (CSOs) have emerged. These companies comprise a complex value network providing services to one another, through alliances and market transactions as well as supplementing the knowledge base of the pharmaceutical companies.

CT

PhysicalChem.

MRI

PET

HTS Proteomics

Bioinform. FunctionalGenomics

Chem-inform.

Pharmaco-genomics/

Combi-chem.

Biol./Molec. Bol.

Discovery Development Registr. Mfg M&S

Pharmacology SM-Mfgtechnol.LM-Mfgtechnol.

Chem./Biochem./Med. chem.

Genomics/Genetics

Source: Granberg and Stankiewicz (2002).

Figure 7.1 Pharmaceutical value chain: major specialisations

Discovery Development Registr. Mfg M&S

‘Big Pharma’

‘Small Pharma’Acad. res.units Res. hospitals

Non-pro!tlabs

CMOs CSOsCROsBT/enabl.technol. BT/platf

Bio Info

BT/suppl.

Drug deliv.

BT/therapy

Source: Granberg and Stankiewicz (2002).

Figure 7.2 Pharmaceutical industry value chain and the set of specialist ! rms

The Act gave the universities, small business and non-profits intellectual property

control of their inventions and other intellectual property that resulted from federal

funding (BayhDole25, 2006).

Configuration of a New Value Chain

The economical and business changes aforementioned affected the configuration of the

biotechnology sector, especially related to the pharmaceutical industry, generating a

great number of specialist start-up companies. In the figure 1, Granberg and

Stankiewicz (2002) show a scheme of the value chain incorporating what they call the

specialist companies. The specialist companies such as platform, therapy, informatics,

supplier and drug delivery concentrate mainly in the discovery and development links,

the initial sections of the value chain (Granberg & Stankiewicz, 2002).

More specifically, Mehta (2008) schematizes the different links in the value chain for

drug development in the figure 2 (next page). In brief, the drug development process

starts with the discovery project of a target’s key involvement in a disease; this target is

commonly a protein, enzyme or a receptor in a cell or tissue that has been discovered to

play a central role in the development of the disease or symptoms. The potential drug,

then, is submitted to tests on toxicology and validation on animals.

Figure 1. Pharmaceutical industry value chain and the set of specialist firms.

Granberg & Stankiewicz, 2002.

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//FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 20 [1–35] 9.11.2007 3:40PM

Manufacturing, marketing, and salesThese final stages of commercialization can easily become the most challenging. In

the early stage, the technology, direction of research, etc., were still under companycontrol; at this stage, outside regulatory agencies, payers, users, and others dictate

procedures and processes, and standards have to be followed. Reimbursement ofthe product through third-party payers adds a level of complexity to the regulated

biotechnology andmedical device industry, when compared with other commercialmanufacturing industries.

1.8.1 Drug development process

The drug-development value chain shown in Figure 1.3 (and discussed in greater

detail in Chapter 4) begins with a discovery project. The project is typically initiatedby discovery of a target’s key involvement in a disease. The target is usually aprotein, an enzyme, or a receptor in a cell or tissue that has been discovered to play

a central role in the development of a disease or its symptoms. The drug can be asynthetic chemical small molecule that binds to the target and inhibits or activates

its function or it can be a biological molecule that replaces a missing or defectiveenzyme or protein. A large part of the effort in pre-clinical research work is to verify

the validity of the target (to verify that interventions aimed at the target will havethe desired effect on the system) and to develop a molecule that can become a drug

compound. This pre-clinical research stage then ends when the two key milestones

Manufacturemarketing

sales

Clinicaltrials

Discoveryand

Pre-clinical $

Target biology Lead drug candidate

Disc-overy

Identi-fication

Valid-ation

Pre-clinicalvalidation,toxicology

PhaseI

PhaseII

PhaseIII

Manufacturing,regulatoryphase IV study

Distributionchannels,marketing

Early manufacturing

Physician,hospital,consumer

Post-approval trials

Years

Val

ue $

Figure 1.3 Drug discovery process and value chain.

20 The drug, diagnostic, and devices industries

Later, the potential drug needs to be presented to basically three clinical trials on

humans evaluating the toxicity, effects of the drug on humans and efficacy at treating

the disease. Once the clinical trials are complete, it is submitted to approval to the FDA.

A fourth phase takes place when marketing the drug in the market, usually required by

the FDA to corroborate the efficacy of the drug on it use. All this whole process can

take from twelve to sixteen years, and hundred of millions of dollars (Mehta, 2008).

The large pharmaceutical companies, even though today continue participating in all the

stages of development from the discovery to marketing and sales, in the past they were

the only players controlling the market. Nowadays, on each link of the value chain they

look for complementarities from other newly small companies, especially in the early

stages of development, such as discovery and development. On the other hand, the

small specialist companies focused on the early stages look for complementarities to

continue to later stages via partnering, licensing out or selling their technologies to the

big pharmaceutical companies (Bianchi et al., 2010).

Also, Helm and Kloyer (2004) state that in high technology industries, such as

biotechnology, the R&D suppliers are usually specialized in the early stages of the

innovation process, i.e. basic research and applied research, whereas the pharmaceutical

companies or R&D buyers aim at the later stages of the process performing activities in

the development, production and commercialization of final products (Helm & Kloyer,

2004).

As the number of big pharmaceutical companies and small biotech ventures increased,

they realized that to continue in the game, they needed to enhance the level of

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interactivity among them and other external sources of innovation to have access to new

knowledge and technologies. These strategies range from simple collaborations and

exchange of information to in licensing deals and strategic partnerships, all of them

depending on the market structure and the competitiveness of the companies. Their

business model flexed toward a more open concept, using external sources and not

necessarily developing the technologies in-house as in the past, evolving from the

concept of the closed innovation to open innovation -defined by Chesbrough as “firm

level strategies where purposive inflows and outflows of knowledge are used to

accelerate internal innovation, and expand the markets for external use of innovation”

(Chesbrough, 2003). An example of this new strategy is found in Merck Pharmaceutical,

which has implemented an open model of innovation using alliances and licensing

according to its booklet of partnerships: “Our licensing strategy has resulted in high-

value alliances. Approximately 63 per cent of Merck’s 2009 sales were attributable to

alliance products and patents, including some of our biggest blockbusters2. We have

applied our marketing and sales expertise to achieve extraordinary commercial success

with our partners” (Merck Sharp and Dohme Corp., 2009).

This phenomenon was provoked by the fact that external scientific knowledge expanded

in the recent years in universities, research institutions and other private companies, not

only in terms of basic but also in applied research, bringing to life serious breakthroughs

that endangered the profitability of small and large firms on this industry.

Malik (2009) observed that leading pharmaceutical companies have recently begun to

focus on filling their pipelines with innovative protein-based drugs, which were

particularly risky to develop and because up until now big pharmaceutical companies

could generate good profits from small molecule drug alone, so they had no real need to

use other technologies (Malik, 2009). For that reason, pharmaceutical companies have

been late entering the biotech space, forcing them to use other strategies to acquire

technologies to robust their pipelines (Aitken et al., 2000). Some reasons why the large

pharmaceutical companies partner with biotech companies –and usually acquire after

the biotech company turns out to be a good strategic fit for the drug market- are: first, it

lets the pharmaceutical company enter a new therapeutic area, in which it has no

presence; second, it can fortify a drug maker’s existing franchise in a particular

--------------------------------------------------------2 A drug is called “blockbuster” if it generates more than US$ 1 billion annually. Source: Malik (2009)

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therapeutic class allowing it to become strengthen its global leadership; third, it gets

access to the proprietary drug discovery platform of the biotech company; fourth, it

harnesses the innovative culture at biotech firms to help them replenish their pipeline;

fifth, non-U.S. companies use this strategy to gain access to the American market,

among other reasons (Malik, 2009; Fischette, 2004; Taunton-Rigby, 2001).

Nevertheless, these reasons might not be static. McCutchen and Swamidass (2004)

found out that the motivations for strategic alliances in the pharmaceutical/biotech

industry suffered variations considering different periods of time. As for example,

during the 1980’s, the main motivation was market access, whereas the need for risk

reduction played the major motivation for strategic alliances in early 1990’s (Mccutchen

& Swamidass, 2004).

Commercialization Strategies

The rapid development of technologies and the access to external sources made the

firms to rethink the way they were doing business and to concern about the necessary

assets they needed to be profitable.

According to Smith and Parr (2004), every company comprises three basic assets:

monetary assets, tangible assets, and intangible assets. The monetary assets or working

capital refers to cash, short-term investments, inventories, raw materials, work in

progress and finished goods. Tangible assets are composed of plant, property, and

equipment, etc. Intangible assets and intellectual property usually do not appear in a

balance sheet of a company. Rights, relationships, human capital and intellectual

property integrate the group of intangible assets, which commonly is the most important

part of an R&D intensive company. Rights are acquired through contractual agreements

with other businesses, individuals, and governmental bodies. These rights exist

according to the terms of a written contract that de!ne: the parties to the agreement; the

nature of the rights, goods, or services transferred; the transfer consideration; and the

duration of the agreement. A contract may have little value unless its provisions result

in an exchange that is of economic bene!t to the business. The rights are a mean of

control in a collaborative strategy Intellectual property includes patents, copyrights,

industrial secrets, trademarks, and computer software, among others.

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For that reason, two of the major concerns of any biotech company is the protection of

its intellectual property, since most of them are R&D intensive, and any discovery and

new developed technology, if not protected properly, might make it lose in the market;

and the access to the three type of basic assets through collaborative strategies with

other parties (Smith & Parr, 2004).

As above-mentioned, the small biotech firms assumed the role of specialized suppliers,

which often are bound by the scarcity of resources, specially to take the discoveries to a

further development or, even more difficult, to reach their commercialization in the end

market. This situation commonly inhibits to market the biotech products just on time if

done lonely. The R&D intensive firms need to access to technological assets, acquire

market knowledge, overcome barriers to entry, expand horizontally, achieve economies

of scale, co-opt and block competitors, share costs, and in general access to

complementary assets (Narula & Dunning, 1998).

Under this situation, a new biotech firm must choice between two options, which are

not necessarily mutually exclusive. First, continue the race alone reinvesting in a

product progression, starting offering cheap products such as monoclonal cell lines, then

moving onto reinvesting in more capital intensive products such as diagnostic kits, later

on jumping into developing and producing drugs for human use, which require very

high amounts of resources and capital (Smith, 1988). Second, play a series of

collaborative strategies as a form of exploiting intellectual property, involving

relationships with other firms and institutions such as: licensing, R&D cooperation,

research joint venture and research corporation.

Both options can be achieved in parallel if planned in a strategic form into the business

model of the company. For example, a company could be working in a diagnostic kit

while doing a collaborative research with a big pharmaceutical firm, while extracting

explicit and tacit knowledge (Sanchez, 2004), and resources to scale up on the

development of more profitable products.

Business models and type of companies

A business model describes the rationale of how an organization creates, delivers, and

captures value (Osterwalder & Pigneur, 2009). When classifying the type and business

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models of a biotech company, it is important to understand the commercialization

strategy that the firm chooses. There are several classifications given by academics and

practitioners depending from the point of view.

For example, Libaers and Hicks (2002) define one of the types of companies as a ‘small

development stage firm in bioscience’ with a pipeline, though perhaps no actual

products at present, often no revenue and no commercialization, though it is often

public. One example of this is a biopharmaceutical company focused on the

development of monoclonal, antibody-based products for the targeted treatment of

cancer, autoimmune and other serious diseases. This company is a trader of ideas that

identify itself as a product firm, and its R&D may generate revenue. Another type

defined by Libaers and Hicks is the “R&D organization or contractor”, which is a small

firm with profound expertise in narrow research areas in which they conduct

basic/applied research with a commercial orientation, and sells prototypes, patents, or

novel production, processes, and tacit know-how (Libaers & Hicks, 2002).

Similarly, Rasmusen (2010) and Orsenigo (2001) classify the biopharmaceutical

companies in drug discovery and platform technologies. The former is based on

biological hypotheses and molecules that tend to be specific to given fields of

application (co-specialized technologies), while the latter is characterized by the

emergence of new generic tools (transversal technologies) (Rasmussen, 2010; Orsenigo,

2001). Many times the business model of the platform technologies is based on contract

research and services to other biotech or pharmaceutical companies.

Other types of companies involve also devices and diagnostics. According to Mehta

(2008), nowadays the term biomedical technology companies is used to refer to

companies whose product need the Food and Drug Administration (FDA) approval to

get to market. The technologies include engineering and various sciences, including

natural (e.g., life sciences or biology) and applied sciences (e.g., materials science). In

that sense, the term biotechnology and device have been blurring boundaries today, as

an increasing number of leading medical device companies are incorporating biological

therapeutics such as cells, DNA, or proteins, and pharmaceutical companies are

increasingly tying their products to diagnostic or delivery devices. The integration of

several technologies into one is called combination product (Mehta, 2008).

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Medical devices, according to the FDA, range from simple tongue depressors and

bedpans to complex programmable pacemakers with microchip technology and laser

surgical devices. In addition, medical devices include in vitro diagnostic products, such

as general-purpose lab equipment, reagents, and test kits, which may include

monoclonal antibody technology. Certain electronic radiation emitting products with

medical application and claims meet the definition of medical device. Examples include

diagnostic ultrasound products, x-ray machines and medical lasers (Health, 2011).

For the case of diagnostic kit business, the commercialization process is a bit different

and less strict in terms of regulation than a drug development business. Mehta (2008)

defines six steps shown in the figure 3, starting with a biomarker identification and

validation, clinical test development, then going through a process of manufacturing for

research use only to finally validate the diagnostic in retrospective clinical (Mehta,

2008).

Collaboration forms

As mentioned before, most of small biotech companies are usually constrained by

resources to continue with the development of its discoveries, technologies and their

commercialization, needing to get access to co-specialized and complementary assets

that other parties possess (Deeds, 1996; Silipo, 2008). Complementing the above-

mentioned definitions of assets, Teece (1986) defines complementary assets as those

//FS2/CUP/3-PAGINATION/MCOM/2-PROOFS/3B2/9780521870986C01.3D 24 [1–35] 9.11.2007 3:40PM

clinical trials. The results are submitted to the FDA and on approval, the device can

be distributed and marketed. This entire process can take from two to six years andfrom a few million to tens or hundreds of millions of dollars (time and costs vary

widely owing to the diverse nature of products in this industry). Product develop-ment stages are discussed in greater detail in Chapter 4. The component profit-

ability has not been analyzed here, because of the diverse nature of products andfirms in the device and IVD industry. A specific value chain and pathway for

development in the diagnostics industry is shown in Figure 1.6. Diagnostics offerseveral intermediate steps for commercialization, as the industry has a large marketfor non-regulated supplies – hence the value chain for diagnostics is shown in a

different format here.

1.9 Technology trends in biomedical device and drug development

In depth information in an area builds momentum as multiple iterations are made

for better understanding of a phenomenon or a technology, ultimately leading tobetter tools and new applications and products. These new applications, tools, or

products eventually lead to new information that enters the cycle shown inFigure 1.7. The spark of curiosity of humans and the intensified, globally compe-

titive research activities of this century are the drivers for innovations, new tech-nologies, and applications entering the market.

1.9.1 Drug development technology trends

Technology has played an important part in drug development and discovery overthe years, either by opening new pathways for better treatments or by speeding up

the process of developing drugs. Most early drugs were derived as extracts fromnatural sources. The components of these extracts, when purified, were identi-

fied and synthesized using chemical synthesis methods to yield a reproducible

Biomarker identification and validationInternal R&DIn-licensing

Manufacturingrequirements

Clinical test developmentProduct specificationsTechnical platformPerformance criteria

Analytical performance optimization and assessment

Scale-up and manufacturing

Retrospective clinical validation

CommercializationResearch use only (RUO)

Performance,Utility criteria

Performance,Utility criteria Prospective clinical validation

Registration and commercializationPMA, CE Mark test

Registration and commercializationCE Mark, 510(k) tests

Figure 1.6 Diagnostics commercialization value chain.

24 The drug, diagnostic, and devices industries

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required to successfully exploit a new innovation (Teece, 1986). They include

manufacturing, marketing, organizational, and financial assets (Deeds & Hill, 1992).

Extracted from Narula & Hagedoorn (1999), a complete list of possible agreements in

R&D collaboration is shown in the following 4.

At the top, it is found the wholly owned subsidiary, which is a branch of another

company, its governance is completely interdependent of the parent company, and their

projects are a strategy of internalization of R&D. In the next level, the equity

agreements are integrated by equity joint ventures such as research corporations and

joint ventures, and lesser equity agreements such as minority holding and cross holding.

For a strategy of a minor degree of interdependence and internalization of R&D, the

companies opt for non-equity agreements, which could be joint venture R&D

agreements such as joint research pacts or join development agreements, where in this

case, the companies remain independent. Another strategy, in this same level of

interactivity, is the customer-supplier relation conformed by R&D contract, co-

290 R. Narula, J. Hagedoorn /Technovation 19 (1999) 283–294

Fig. 4. Organizational modes of interfirm cooperation and extent of internalization and interdependence.

Table 3

Evolutionary changes in the organizational modes used in STP activity

1980–1984 1985–1989 1990–1994

Equity STP 46.9 40.9 26.7

Joint ventures 21.9 23.7 19.7

Other equity SA 25.0 17.2 7.0

Non-equity STP 53.1 59.1 73.3

Joint R&D 38.0 47.5 70.4

Customer–supplier 10.1 8.2 2.7

Two-way technology 5.0 3.3 0.2

100.0 100.0 100.0

Source: MERIT-CATI database.

falls. Furthermore, as firms become more familiar with

a given partner, the risk that a specific partner will be

dishonest declines with every subsequent agreement.

Perhaps more important, though, is that the shift in pref-

erence for equity illustrates that the firms are increas-

ingly motivated to undertake agreements with an

explicitly strategic intent, rather than simply a cost-econ-

omizing one.

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production contract and co-marketing contract. Later on, cross-licensing strategies,

technology sharing and mutual second sourcing or projects integrate the bilateral

technology flows. For a strategy of unilateral technology flows, the companies use the

second sourcing agreements or simple technology licensing. At the bottom of all these

strategies in terms of interdependence and internalization of technology, the companies

use spot-markets, which is defined as a wholly arms length agreement.

In general, the most common contractual collaborative strategies that a biotech firm

could use are described in the following paragraphs.

Licensing deals. Caglio and Ditillo (2009) describe licensing as a centralized form

part of the bureaucratic collaborative inter-firm relationships formalized in an exchange

arrangement or associational arrangements, where the strength of this form of

relationships derive from the legal system, which protects the parties reciprocal rights to

complaint behavior (Caglio & Ditillo, 2009). Licensing is a form of market contract that

includes numerous organizational clauses, accompanied by extra-contractual

organizational relations (Grandori & Soda, 1995). This is the most common form of

exchange. The owner(s) of the rights to intellectual property agrees to transfer some of

the rights to another in exchange for money, goods or services. This is contractual with

terms specified in a written contract. Among the main advantages of this strategy is the

small investment required, the owner can retain some rights and control over the

property and it does not require a long-term commitment. On the other hand, the

disadvantages are the loss of control over those rights granted to the other party,

administrative cost, spillover of important knowledge and the possibility of a poor

licensing contract (Smith & Parr, 2004). This mode of cooperative commercialization is

also defined as a non-equity mode of organizing collaborative relationships, and it may

include alternative forms like supply arrangements, and other non-R&D activities

(Aggarwal & Hsu, 2009).

The other modes of cooperative R&D commercialization involve a partnership between

companies defined as ‘R&D partnerships and alliances’. They are part of the parity-

based bureaucratic collaboration forms. Hagedoorn (2002) defines an R&D partnership

as the specific set of different modes of inter-firm collaboration where two or more

firms, that remain independent economic agents and organizations, share some of their

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R&D activities (Hagedoorn, 2002), such as groups of researchers that collaborate in

firms, while maintaining strong contacts with other firms and universities in the

biotechnology industry (Caglio & Ditillo, 2009). An R&D partnership is a part of a

group of inter-firm relationships found in between standard market transactions of

unrelated companies and integration by means of mergers and acquisitions. One main

difference between a partnership and an alliance is that in the alliance, besides all the

features of a partnership, the development or transfer of technologies is in place. The

large pharmaceutical companies make an extensive use of alliances with small R&D

firms.

Alliances cover several governance modalities ranging from market transactions to

organizational hierarchy. An alliance is defined as any inter-firm cooperation that falls

between the extremes of discrete, short-term contracts and the complete merge of two or

more organizations (Contractor & Lorange, 2002).

Figure 5. Alliances types. Contractor & Lorange, 2002.

The figure 5 shows that alliances can be horizontal or vertical. In the case of horizontal

alliances, the firms can be competitors and cooperate in R&D, or the R&D divisions of

two firms may cooperate on joint work. A vertical collaboration occurs frequently

between firms located at different levels of the value chain, for example in research-

intensive businesses such as in biotechnology, where innovative start-up firms hand

over the fruits of their research to established pharmaceutical companies for

commercialization and marketing (Powell, 1998).

To summarize, Hagedoorn (2002) defines two types of ‘R&D partnerships and alliances’

depending on the inclusion or not of equity, i.e. contractual partnerships such as joint

R&D pacts and joint development agreements as non equity collaboration, and equity

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joint ventures such as research corporations (Hagedoorn, 2002). These types are

described below.

Joint Research and Development. These are parity-based bureaucratic forms

(Caglio & Ditillo, 2009) using contractual arrangement such as joint R&D pacts,

contract research3 or consortia to cover non-equity agreements that are created so that

firms and other organizations can pool resources in order to undertake joint R&D

activities. Although the success of such agreements is dependent upon a strong

commitment of the partners, the organizational interdependence is usually less than in a

research corporation because no new organizational entity is established (Hagedoorn,

Link, & Vonortas, 2000).

Research Corporation or R&D Joint Venture. At least two firms combine their

R&D skills and resources in this mode of cooperation through equity joint ownership of

a separate firm, and generally this new firm or child performs only R&D that fits within

the broader context of the research agenda of the parent firms. It is important to note

that this form of collaboration has been decreasing recently due to its high

organizational cost and high failure rate (Narula & Hagedoorn, 1999). These forms of

collaboration pertain to the parity-based proprietary forms, and the holding of equity or

rights is normally formalized and fosters cooperation particularly in settings

characterized by uncertain conditions and risks of opportunistic behavior (Hiil, 1990)

(Caglio & Ditillo, 2009).

Form of Transactions and their Risks

The collaborative strategies that a biotech firm chooses will always imply a form of

transaction with other parties linked through formal or informal contracts (Argyres &

Liebeskind, 1999). Each of these strategies will demand a different level of relationship,

sharing of information, knowledge spillovers and hence risks of opportunistic behavior

by the parties involved, engaging in lying, deceit or cheating. Opportunism, as

Williamson (1985) defines it, “…is the self-interest seeking with guile… More

generally, it refers to incomplete or distorted disclosure of information, especially to

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calculated efforts to mislead, distort, disguise, obfuscate, or otherwise confuse”

(Williamson, 1985). The opportunism might be inherent in many transactions.

Any collaborative strategy will require transaction costs, which are the cost of

negotiating, monitoring and enforcing a contingent claims contract. According to Hill

(1992), there are three types of concerns in transactions costs: uncertainty of the real

value of the technology, costly monitoring, and second-order diffusion. He posits that a

firm could have no complete information about the real value on the market for the

technology, suffering the consequences of uncertainty during the negotiation at giving it

away at a lower price. Additionally, once the collaboration is on course, the company

runs the risk of opportunistic behavior of the other party, reason why the company could

be obliged to spend resources at monitoring the behavior and enforcing the contract

with the other party(ies). The second-order diffusion refers to diffusion of the general

know-how underlying the technology to be transferred, which could occur when the

firm owning the technology discloses information during and after the deal, which could

be used by other parties to their advantage. Finally, a firm ends up facing transaction

costs of contracting and expected loss anticipated by the firm due to unanticipated

contingences and opportunism by the other party (Hill, 1992).

In the same logic, Helm and Kloyer (2004) posit that one of the main objectives in the

externalization of R&D is to reduce opportunism motivation of R&D suppliers, which is

caused by exchange risks denominated ‘profitability risk’ and ‘competitor creator risk’.

The former constituting the danger to obtain a lower profitability than the exchange

partner, while the latter would be the result of unintentional, one-sided knowledge flows,

which help the exchange partner to become a competitor. So, a firm will try to control

opportunism to avoid or minimize agency and transaction costs (i.e. exchange

coordination, monitoring and adaptation). They suggest that the perceived exchange

risks could be reduced by contractual provisions (see Helm & Kloyer, 2004).

The selection of internal (hierarchical) and contractual (market) modes of exploitation

of technology depends on series of crucial factors that have to be put in a balance.

Among those elements are: the business model of the company; capital investment

required to commercialize the technology; expected profitability; prior licensing and

partnering experience; competitive environment and market growth; the regime of

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appropriability –which refers to the environmental factors, excluding firm and market

structure that governs an innovator’s ability to capture profits generated by an

innovation, such as nature of technology, and the efficacy of legal mechanism of

protection (Teece, 1986); transaction costs and; bargaining problems (Pisano, 1990),

among others.

Control Rights

So far, a description of the most common commercialization strategies and risks has

been presented. If after the evaluation of all the aforementioned factors, the firm decides

to enter into a formal collaboration agreement through a contractual arrangement with

another company -using some of the commercialization strategies mentioned before-, a

negotiation is an unavoidable step where both parties engage in defining the numerous

clauses of the contract. Such clauses will include the rights and obligations of each firm

to perform the project, object of the agreement. It is through these rights and obligations

that a firm can exert or give away control, affecting its benefits and wealth, which is the

main objective of any for-profit business.

For Edwards (2009), there are two different types of control in a contractual form. The

control rights, which are defined as the owner’s ability to in"uence the way a

!rm/project is run, whereas the second type is the cash-"ow rights of ownership, which

refer to the fraction of the !rm’s pro!ts to which an owner is entitled. These two terms

are commonly referred simply as control and ownership (Edwards & Weichenrieder,

2009). For the purpose of this paper, we will simply name both as control rights, unless

specified differently.

The allocation of control rights among the parties becomes strategic and particularly

critical in alliances among firms developing new technologies (Lerner & Merges, 1998).

Aghion and Tirole (1994) analyzed the challenges posed by the allocation of control

rights between small research firms and larger corporations in an incomplete contract

framework studying how such allocation of control rights on innovations can affect the

frequency and the magnitude of these innovations when their exact nature can not be

contracted upon ex ante, and defining a number of common contracting and legal

features of the organization of R&D. Their work is also based on the scarcity of

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financial resources that a small research supplier has or its limited ability to access

outside financing. They found that control rights are allocated according to two factors:

• Underinvestment by both parties. Property rights are allocated to the research

supplier when the marginal efficiency of its efforts is large enough relative to that of

the customer’s investment4.

• The relative ex bargaining power of the two parties. The allocation of property

rights is always efficient when the research unit has the bargaining power ex ante,

while the research unit’s cash constraint may induce the customer to efficiently

retain ownership when having the bargaining power ex ante (Aghion & Tirole,

2004).

Their analysis is made in an incomplete contract framework, positing that the exact

nature of the innovation is ill-defined ex ante and that the two parties can not contract

for delivery of specific innovation, including that it is costly for agents to write detailed

long-term contracts that precisely specify current and future innovations as a function of

every possible eventuality and that, as a result, the contracts written are incomplete and

will be subject to renegotiation later on (Hart & Moore, 1990). Thus, involving two

scenarios on which the bargaining power takes effect: the integrated case and the

nonintegrated case. In the integrated case, the customer owns and freely uses the

innovation, while in the nonintegrated case, the research supplier owns the innovation

and, once the innovation is made, bargains with the customer over the license fee.

Additionally, Aghion and Tirole recommended that giving property rights to the

research firm is optimal when it is more important to incentivize the firm’s effort to

discover than to benefit the customer’s financial investment in the research. They also

posit that as the value of innovation increases, the customer may either insist on keeping

or acquiring property rights to fully capture the whole value of innovation, or instead

want to relinquish property right to the research supplier to elevate the research unit’s

incentives to innovate through the nonintegrated case, whereby the research unit retain

the property rights.

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Moreover, Lerner and Merges (1998) made and exhaustive research in terms of the

allocation of control rights in alliances among firms in the biotechnology industry

seeking to develop new technologies. They suggest that control rights should be

assigned to the R&D firm when the marginal impact of its effort on the value of the

final output is greater than the marginal impact of the financing firm’s financial

investment. Also they observe a positive relationship between the financial health of the

R&D firm and the number of control rights that it retains. In this same sense, Lerner

and Merges enlisted 25 possible control rights –shown in the figure 6- that firms usually

negotiate in an R&D alliance agreement, classifying them in terms of four dimensions:

key aspects of alliance management, determination of alliance scope, control of

intellectual property, and governance structures.

Key aspects of alliance management5:

1. Right to manage clinical trials 2. Right to undertake process

development 3. Right to manufacture final product 4. Right to market universally 5. Right to market product alone

Control of intellectual property:

1. Ownership of patents 2. At least partial patent ownership 3. Control of patent litigation 4. Right to know-how transfer 5. Ownership of core technology 6. Right to delay publications 7. Right to suppress publications

Determination of alliance scope:

1. Right to expand alliance 2. Right to extend alliance 3. Right to terminate alliance without

cause 4. Right to terminate particular projects 5. Right to sub-license 6. Right to license after expiration /

termination 7. Right to shelve projects

Governance structures:

1. Control of top project management body

2. Seat on R&D firm’s board 3. Equity in R&D firm 4. Right to participate in R&D firm’s

financing 5. Right to register R&D firm’s stock 6. Ability to make public equity

purchases

Figure 6. List of control rights. Lerner & Merges, 1998.

Of all these 25 control rights, Lerner and Merges gave critical importance to the first

five control rights in the dimension of key to management of alliance.

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Lerner and Merges’s results show that when a research supplier has an early-stage

technology and makes an alliance with a much larger financing firm, the research

supplier usually tends to forgo more control rights. The same happens when the

research unit has fewer patents, an indication that it may also have few financial

resources (Lerner & Merges, 1998).

Bargaining Power

Some other researchers have also argued that the bargaining power also influences the

allocation of control rights in a negotiation. Argyres and Liebeskind (1999) define

bargaining power as ‘‘the ability of one party to a contract to be able to influence the

terms and conditions of that contract or subsequent contracts in its own favor’’ (Argyres

& Liebeskind, 1999).

It is unlikely that two firms, especially if one is small and the other one is larger, will

have their interests perfectly aligned in a negotiation of contracts (Bosse & Alvarez,

2010). Many scholars have studied the different factors affecting the bargaining power

of the firms, some of them focused on the study of R&D on the biotechnology field (e.g.

Gans & Stern, 2000).

Once again in Aghion and Tirole (1994), considering the proposition 1 -“the research

unit’s cash constraint may induce the customer to inefficiently retain ownership when

having the bargaining power ex ante” (Aghion & Tirole, 2004). Higgins (2007) revealed

that the condition of public equity markets and financial health are important

determinants of the allocation of control rights; and the pharmaceutical firms that have

research pipeline concerns tend, on average, to give up control rights in later stage

alliances. He also discovered that biotechnology firms relinquish more rights in earlier

stage projects (Higgins, 2007). In Lerner and Merges (1998), the sample resulted that

small biotechnology firms that have more financial resources are allocated more control

rights in their alliances (Lerner & Merges, 1998).

Most of the literature measuring bargaining power is based on quantitative studies,

ignoring the potential of qualitative research based on the point of view of real

practitioners trying to extract other factors affecting the bargaining power of a firm.

This quantitative studies usually intent to find relationships between variables such as

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the level of cash of a firm when signing the agreement, or analyzing the external

financing options on the market for biotech firms as a basis to define the bargaining

power of the firm and the allocation of property rights (Lerner, Shane, & Tsai, 2003); or

simply the stage of development of the technology when doing the alliance (Higgins &

Rodriguez, 2006). Roger Fisher and William Ury, members of the Harvard Negotiation

Project, state in their bestseller book ‘Getting to Yes’ (1981) “People think of

negotiating power as being determined by resources like wealth, political connections,

physical strength, friends, and military might. In fact, the relative negotiating power of

two parties depends primarily upon how attractive to each is the option of not reaching

agreement.” Then, they continue providing an example as a conclusion: “The relative

negotiating power of a large industry and a small town trying to raise taxes on a factory

is determined not by the relative size of their respective budgets, or their political clout,

but by each side's best alternative.” In the same sense, they state that the ‘Resources’ are

not the same as ‘Negotiation Power’. Fisher and Ury define negotiation power as the

ability to persuade someone to do something (Fisher & Ury, 1981).

There are a large number of interrelated factors that affect the relative power of

contracting parties (Argyres & Liebeskind, 1999). Some of these factors could be

reputation of the firm, possession of skills and knowledge, value of the innovation,

control and access to specialized tangible and intangible assets, alternatives to selection,

existence of few options available also known as small numbers bargaining (Pisano,

1990; Caves, Crookellandj, & Killing, 1983), and specific investment made by the

parties (Argyres & Liebeskind, 1999).

Research literature abounds in terms of how the bargaining power affects the allocation

of property rights in the negotiation of agreements. But it is poorly studied in terms of

the whole variables factors intervening in such bargaining power of a firm. Most of the

literature describing such factors is mostly found in professional publications made by

business practitioners and negotiation experts presented on a qualitative form and in a

case study basis.

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ANALISYS AND DISCUSSION OF PRIMARY

FINDINGS

This section addresses the analysis of the primary findings obtained through the

qualitative research using in depth-interviews to business practitioners. The business

practitioners were: a technology manager of a Danish university technology transfer

office; a manager of a Danish platform technology company for biotechnology research

purposes; a business developer manager in a Mexican contract research and

development company; an investment manager in a Danish pre-seed investment

organization for start-ups; a technology management specialist in the U.S.; a manager of

a Danish biomedical (diagnostic kit) company; a business developer of a large

pharmaceutical company; and a marketing director of a Mexican pharmaceutical

company6.

This section is divided into four parts, each one addressing each research question

starting with the commercialization strategies used by the research suppliers. Later on,

the control rights that the R&D providers try to retain and forgo in a negotiation are

discussed. Immediately later, the topic of the bargaining power in the negotiation

process is presented. Finally, the perceived risks by the practitioners during the

collaboration process are addressed together with the mitigation strategies that should

be implemented. It is important to note that along this section you might find also an

extensive used of literature and personal observations to support or contrast some of the

findings of the primary research.

Commercialization Strategies

The technology specialist confirmed that the model of in-house research and

development, used for long time by the large pharmaceuticals, has been declining over

the past decade; nowadays, the firms can go out and shop the technologies that they are

interested in at the universities or small companies.

In the literature review we discussed that an R&D provider has several strategies to

follow depending on: the external circumstances, the company strategy, its management,

and the stage of technology development, among other factors. Those strategies could

--------------------------------------------------------6 For information about the profile of the interviewees, a summary of the interviews and the complete

interview transcripts go to the appendix section.

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be: licensing-out agreements, sale of the technology, a direct commercialization to an

end market, or collaborative strategies such as R&D joint venture or joint R&D.

According to the interviewees, the two most used strategies of the small biotech

companies are ‘licensing-out deals’ and R&D collaborative forms specially

‘partnerships and alliances’. But all in all, they vary depending on each case. For

example, when the technology belongs to a university or research center, it is more

probable that the firm acquiring the technology will be through in licensing, getting the

authorization by the university to exploit the technology in a certain market or

application. On the other hand, if the technology belongs to a private small firm and it

has the resources and capabilities to commercialize it, it will probably do so. By doing

this, the company might secure to maximize the profits exploiting directly the

technology. Nevertheless, if the small company does not have the resources or

complementary assets to commercialization it, it will have to implement other strategies.

Though, as mentioned in the literature review, there might be other companies with

hybrid strategies, i.e. providing research services while working on owned projects and

developing their own capabilities and complementary assets.

For example, the CEO of the Danish technology platform company mentioned that the

main strategy of the company is to commercialize their own technologies directly;

meanwhile, as a secondary strategy it offers research services using their platform

technologies and capabilities. Similarly, the Mexican research and development contract

organization provides R&D services to customers as part of its main business, but it also

acts as an incubator with some projects brought by customers. These are examples of

organizations using a combination of commercialization strategies including the

collaboration as part of their business strategy.

For the case of small companies with proprietary technology and not capable of doing

their own commercialization in an end market, the option left is by using collaborative

forms. However, according to the interviewees and the reviewed literature, it is common

to find hybrid models that include licensing and partnering at the same time. This is a

common case when it comes to partnering with large pharmaceuticals.

The interviewed investment manager commented that “…in the business of drug

development, the small companies lack the financial requirements, and they will be far

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beyond what they can provide in terms of economical resources considering that around

a development of a drug could take up to between 2.4 to 3 billion Danish kroners7”.

That is one of the reasons why a small firm could not be able to take a product into the

final market alone, and only a few have reached this goal and become a full-fledged

biotech company such as Genentech, Amgen, Genzyme, to mention some. This is

consistent with the appreciations of Humphrey (1996). Thus, many of the small biotech

companies on this business need first to answer the question “Can we develop this

compound to a stage where we can make big pharmaceutical or big biotech interested in

our technology?” That stage is usually the point of proof of concept8 of the drug. The

figure 7 shows the point of inflexion as the investment manager explained during the

interview.

Figure 7. Position of the proof-of-concept point of inflexion in the stages of drug development. Own creation

with information provided by the interviewees.

In the proof-of-concept inflexion point the value of the technology rises, since it

promises to work properly as planned and producing no toxicity in animals, and in a

first sample of humans. For that reason the small firm tries to reach this point to be able

to attract the attention of the large companies with a stronger valuation, while having a

stronger valuation of the technology.

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The business developer of the large pharmaceutical mentioned that the large

pharmaceutical company is usually open-minded when searching for opportunities to

partner with small firms that own interesting technologies, and it consider companies in

all stages of development and all types of projects. Although the main focus of the large

company will be tend to be platform companies as partners, and the most common

practice to acquire technologies is through in licensing deals. He also commented that

when a small company has only one product, the acquisition could work as a better

option if that makes more business sense. This last strategy, according to Narula and

Hagedoorn (1999), works as a complete internalization of the technology increasing the

interdependence of the two entities (Narula & Hagedoorn, 1999). Malik (2009), states

that the acquisition of a biotech firm by a pharmaceutical manufacturer often follows on

from an earlier alliance between the two parties, since a partnership permits drug

makers to test the waters to establish whether companies are a good strategic fit, but

also they help to drive away other potential acquirers (Malik, 2009).

As a recommendation, the marketing director of the pharmaceutical company argues

that the most popular business practice in this sector is when the small biotech company

establishes a collaboration strategy with a large pharmaceutical defining a set of

milestones together with a payment mechanism in a plan. Thereby, the small company

receives the resources from the large company once it accomplishes the defined goals.

More detailed descriptions of the most relevant commercialization strategies mentioned

by the interviewees are unfolded below.

Licensing strategy

This strategy is commonly the case of small R&D companies that have discovered and

developed a technology that is attractive to other companies, and they do not have the

complementary assets such as manufacturing facilities, market channels, capital, etc. to

commercialize it in an end market. This strategy helps diffuse the technology in a

sooner mode, and to impede other firms in the industry to impose their own standards if

done in the early stages (Caglio & Ditillo, 2009).

This strategy is also executed in developments and discoveries made inside public

centers for research and universities, on which the main goals are the discovery and

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development of new technologies, not necessarily the commercialization in end

markets; nonetheless this could vary also depending on the strategy of the university.

The business developer of the large pharmaceutical stated that the majority of the deals

are by acquiring the license of the small firm, even though each case is evaluated in

order to decide to make a licensing agreement, an alliance, or if it makes more business

sense, to acquire the whole company. An acquisition, according to the investment

manager, is usually when the small company has a pipeline of products in development

that are potential products to be incorporated in the business portfolio of the large

company. One example of these cases commented by the marketing director of the

Mexican pharmaceutical is when the large pharmaceutical Pfizer acquired Warner-

Lambert in 2000 to get access not only to the drug Lipitor®, which became the largest

selling pharmaceutical of any kind worldwide (Pfizer, 2000; Economist, 2002), but also

to and other smaller products and sales capabilities (Kang & Afuah, 2010).

The investment manager and the technology specialist also mentioned the licensing

strategy as one of the main strategies sought by the small firms. Usually, the small firm

will try to get the patent of its technology as soon as possible, since that is its main asset.

Later on, if the firm does not have the complementary assets to proceed with the

development or commercialization, it will approach a larger company potentially

interested in that technology to make a licensing deal. The business developer of the

large pharmaceutical confirmed this information saying that they get many unsolicited

proposals from small firms, even though they also try actively to reach them out aiming

for what could be a good technology for their portfolio.

R&D partnerships and alliances

These strategies are contractual arrangements between two or more companies without

losing each other’s independence. Nowadays, this strategy is commonly used by the

contract research and development organizations, which offer services of R&D

development to a third party, by small R&D suppliers and by large pharmaceuticals

with the purpose of not only licensing in the technology of a small R&D supplier but

also using its built-in capabilities.

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98-

The two interviewed Danish companies mentioned that the main focus of their firms is

to commercialize their own technologies through a direct sale of their products or by

licensing deals. When it comes to partnering with a client that needs to make use of

their facilities or requiring a customized development, they mentioned to be using strict

contractual arrangements as part of the collaboration process in order to protect their

assets. However, one of the firms remarked to be applying, in some cases, more

informal and looser forms of collaboration with no contracts involved, having

interactions with external sources especially ‘researchers’, as part of the open

innovation strategy of the company. Subsequently, when finding ideas in a partnership

with another party, they evaluate who might retain the idea in an open way. If the idea is

mostly related to the company’s business, then they retain the new development,

otherwise they just let it go to the partner. Literally, the CEO of this company said

during the interview: “Every week we have more ideas that we can’t use, so we rather

give them away and see them used than seating on them. If those are good ideas, then

we file a patent.”

Moreover, none of the interviewed companies and specialists highlighted the research

corporation as a commercialization strategy. Most of the collaboration forms are

through partnerships such as joint research and development, and licensing deal for the

case of technologies owned by small companies. These forms are commonly used in a

formal basis with contracts defining the projects, while in some other cases the

collaboration can be present in an informal basis.

For the case of the pharmaceuticals companies, they remarked to be using alliances and

licensing deals -usually in a combined form- especially when the technology owned by

the small firm is part of its main business stream. A company with a technology at the

stage of proof of concept is routinely the main target, although the large pharmaceutical

could be open to earlier stages such as basic research, according to the interviewed

business developer of the large pharmaceutical, exclusively if it has a great market

potential and it offers a competitive advantage. For example, Merck Pharmaceutical

states in one of its booklets about partnerships available on its website that

approximately 63 per cent of its revenues in 2009 came from external sources such as

alliance products and patents, including one of its blockbusters (Merck Sharp and

Dohme Corp., 2009). Checking upon the information contained in the websites of the

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major pharmaceutical companies related to partnerships and alliances, the

implementation of strategies for hunting ideas in the market seems to be an increasing

business practice. These companies have set up strong business development

departments that search outside the company for potential ideas and technologies being

developed. Additionally, once the partnership has been signed with a small firm or

R&D supplier, the pharmaceutical companies establish a special team to manage the

alliance to secure the achievement of the defined goals and commitments always using

contractual arrangements as a measure to protect their intellectual property rights.

By contrast, one Danish CEO stated, “there is a trade off between openness and size, the

larger you are the more you have to protect your ideas. We are small, which means we

gain a lot from being open and interact with researches all over the world…”

Furthermore, the investment manager pointed out that the alliances happen mainly when

the large pharmaceutical is interested in the firm as a whole and its portfolio instead of

only one of its compound, and in using the small company as a feeder of more products

into their own pipeline. Doing so, the large pharmaceutical avoids carrying the fixed

costs since the small firm remains independent. Supporting this observation is the

arguments provided by the marketing director of the Mexican pharmaceutical, who

remarked that the type of collaboration depends strongly in the phase of development of

the technology and its market potential. Thus, for example when the drug is at early

stages previous to the point of proof of concept, the large company could negotiate with

the small firm setting a set of milestones attaching payments as incentives to improve

the technology to take it to further stages. Whereas, when the collaboration takes place

with a product or drug at late stages –i.e. pre-approval by FDA-, the large company

might extend an upfront payment and a combination of expenses and complementary

assets to be used.

Control Rights

Retaking the definition of control rights given by Edwards (2009) as the ability of the

firm to control the way a firm or alliance is run (Edwards & Weichenrieder, 2009), the

allocation of control rights plays a vital role in the achievement of goals in a contractual

agreement either it is a licensing agreement or an alliance agreement. This section

shows the allocation of control rights according to the information provided by the

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practitioners contrasting it with the extant literature. In special, it pays close attention to

the works done by Lerner and Merges (1998), Aghion and Tirole (1994) and Higgins

(2006). Eight out of the nine control rights commented in this section were taken, based

on their level of relevance, from Lerner and Merges (1998) shown in the figure 6 in the

section of the literature review, while the 9th control right was a personal inclusion.

In general, all the practitioners agreed that the allocation of control rights vary from deal

to deal depending on factors like the stage of technology development, resources of the

small firm, negotiation skills and market potential of the technology, among other

factors.

Right to manage clinical trials

Out of the US$800 million necessary to develop a drug, US$568 million or 71 per cent

of the cost occurs during the clinical development and FDA approval stages. This is one

of the reasons that most alliances between pharmaceutical and biotech companies occur

at the phase I or later in the drug development process. The chances that a drug entering

the discovery stage of the process will fail to go through FDA approval is over 90 per

cent; only one in 15 makes it through. The chance that a drug passes Phase I fails to

FDA approval is 75 per cent; only one in four makes it through. One of every two drugs

in Phase II receives FDA approval (Tyebjee & Hardin, 2004). Therefore, this is one of

the control rights that large pharmaceutical usually retain, as revealed in the Lerner and

Merges’s work, showing that in average 57 per cent of the financing companies keep

this right. The business developer of the large pharmaceutical corroborated this

information, though he also commented that it could vary on each case. According to

this practitioner, many deals are with small biotech companies that do not have the

resources to undertake clinical trials, added to that the lack of knowledge, expertise,

competencies that a large pharmaceutical has (i.e. vast experience in dealing with FDA

and shepherding drugs through the FDA approval process). In some cases, a small

biotech will have the resources and will desire to develop the clinical trials. In that case,

the large pharmaceutical will evaluate if that makes sense and if the small firm has the

competences to accomplish the task. In many cases, the small firms usually want to

participate in one way or another, since they could be interested in growing and being

like a large pharmaceutical in the future. Although there is also the possibility to

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9>-

outsource this task to a contract research organization, the large pharmaceutical, at

retaining this right, could decide how to manage it.

Again, according to the investment manager, the lack of resources of the small biotech

firm forces it to look outside the firm to take its technology to a further development.

Once the small biotech firm reaches the point of proof of concept, it may attract the

attention of large pharmaceutical in order to proceed with the phases of clinical trials.

This coincides with the assumption of Aghion and Tirole (1994) that the research unit

lacks financial resources, having to turn to a financial company (customer) for resources.

In some cases, when the small firm has conducted clinical trials, a large company

acquiring the license would even repeat some of the clinical trials since the company

wants to be sure that everything is according to the rules and regulations.

However, another factor that influences the need for resources to proceed with the

development of a drug is the therapeutic class and the population available to apply

clinical trials, according to the marketing director of the Mexican pharmaceutical. For

example, a product for a condition such as heartburn requires a large size of population

to apply clinical trials in the phases III and IV demanding a high amount of resources.

Small companies on these markets try to ally with the large companies. If the

therapeutic class is of smaller dimensions such as oncology or HIV, which are more

specialized classes, the number of patients is not so high, thus the company can prove

the effectiveness of the drug with less patients, hence demanding less resources. For this

reason, the small companies tend to focus more on niche markets or therapeutic classes.

Right to process development and manufacture final product

Similar to the right of management of clinical trials, the rights to perform the

development and manufacture the final product are also sought by the large

pharmaceutical. As highlighted in the literature review, the large pharmaceutical will be

more specialized and will have more resources to dedicate to later stages of

development, while the small firms specialize in the early stages of development.

The investment manager highlighted that in many cases a pharmaceutical company buys

the technology at the level of proof of concept, to later continue with its following

phases of development. For the technology specialist, the process development is done

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primarily by the pharmaceutical company, and usually not even discussed in a licensing

arrangement. But it also depends on the size of the company, its capabilities and

therapeutic class, according to the marketing director of the Mexican pharmaceutical

company.

The business developer of the large pharmaceutical agreed that the small firms are busy

in the discovery and development phases, and most of its resources will be spent on that

without reaching to build manufacturing capabilities, meanwhile the large

pharmaceutical will have already installed capacity. This is also a matter of knowledge

and expertise, since a learning curve could take up years to be at the same level of the

large pharmaceuticals. Nonetheless, every time there are more cases on which the small

firm claims to be involve somehow on these links of the value chain to acquire

knowledge for future developments.

For the case of small companies counting with manufacturing capabilities, one factor

influencing this control right is if the therapeutic class is of a small or large size. If the

population demanding the product is large, then usually the large company has the

manufacturing capabilities. However, if the population with certain disease or condition

is small, and the small firm has the manufacturing capability, then the small will try to

retain this right, a remark done by the marketing director of the Mexican pharmaceutical.

Right to market universally

The technology specialist emphasized that the whole idea of the pharmaceutical

company getting the license from the small firms is to have access to the manufacturing,

marketing and sales rights, since that is where they make money. In general, the large

pharmaceutical will want exclusive rights to market universally overall, but especially

in markets such as United Stated, Canada, Germany, Italy, Spain, United Kingdom,

France and Japan with strong emphasis where the firm has a strong presence. For the

rest of the world, the license is usually offered in packages of regions, for example Latin

America, Asia-Pacific, Rest of Europe, Middle East and North of Africa.

If the large pharmaceutical claims for a worldwide license, the small firms can still

estipulate in the license that the licensee must sell sublicenses to companies with

presence in markets where the licensee does not have a strong presence. So, there are

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different ways to arrange a license. Another strategy of the small firm is to license out

the application of the technology for a particular field of use. Thus, for example the

small firm can give away rights in a worldwide basis but only for its use in a specific

disease or application. The interviewees all agree that the forms of licensing vary case

by case, though the study by Lerner and Merges suggests that in 67 per cent of the cases,

the financial company retains this right.

Right to market product alone (Exclusivity)

This is another right that the large pharmaceutical looks for, especially in technologies

in the field of its disease or business focus, and it is strongly related to the right to

market universally. A large pharmaceutical will desire to have unique rights to exploit

the technology, if not universally, in a specified territory or market, disease or

application. Lerner and Merges (1998) found in their study that 80 per cent of the cases

the financing company owned this right.

However, Dennet (2007) states that the structure of the biotech alliances has been

evolving from the traditional straight licensing to the co-promotion arrangement, in

which the biotech firms participates in marketing and distribution the pharmaceutical

companies changing their partnering models (Dennet, 2007). Surveying the information

available in the websites and booklets by the largest pharmaceutical, this feature is clear.

For example, Lilly has in their partnering models the co-promotion/co-marketing option,

where they include not only small firms into that possibility but also other large

companies in the pharmaceutical industry. The same case is for Pfizer. The business

developer of the large pharmaceutical stated that just like in the same case of the small

firm claiming to participate in the management of clinical trials, the right to market

would also be evaluated and find how the small firm could be involved in the marketing

of the final product if it makes business sense. In the same sense, Dennet (2007) found

out that a small biotech firm will likely try to retain co-promotion rights when it has

more prior R&D activity in the disease field of the alliance, and that retaining co-

promotion rights means the technology firm is more likely to engage in the

commercialization of subsequent products (Dennet, 2007).

One incentive for the small biotech firm is that claiming to be part of the

commercialization of the final product will decrease the risk that the large company

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shelve the technology, ensuring at the same time to acquire the capabilities necessary to

commercialize future innovations alone in the disease field of the alliance.

The technology specialist highlighted the importance for the technology owner to study

and understand the different market applications and market demand in different

territories of the technology in order to define the best strategy for the firm when

defining the rights to retain or forgo that will yield the best paybacks. Hence, reducing

the profitability risk for lack of information described by Helm and Kloyer (2004),

which is the danger to achieve a lower profitability than the exchange partner.

Additionally, another strategy used by the large pharmaceutical is to make an agreement

with the small firm to provide resources and knowledge in exchange of the right of ‘first

refusal option’. This mechanism allows the large pharmaceutical enter into a business

transaction with the small firm, according to specified terms, before the small firm is

entitled to enter into that transaction with a third party (Kahan, Leshem, & Sundaram's,

2007). This mechanism secures the large pharmaceutical to invest only the resources

required per phase in the case of clinical trials.

Right to sublicense

This is another right that turned out to be very variable in the responses of the

interviewees. In the case of the university tech transfer office and the contract research

& development organization, the most common practice is that the right to sublicense is

taken by the licensee, whereas the large pharmaceutical mentioned that it depends on

the deal. The investment manager assured that the large pharmaceutical would retain

this right most of the times; meanwhile the technology specialist commented that the

small firm when licensing to a company in a worldwide basis, even to markets where

the licensee does not have presence, the small firm could specify that the licensee must

sublicense to other company with stronger presence in those markets. This means that

the small firms might use a sublicensing option as a strategy to increase the paybacks.

Right to terminate contract or alliance

This right refers to the possibility to end the continuation of the contract or the alliance.

In some cases the clause includes the termination without cause by any of the parties

involved in a project. It is usually the party with more bargaining party the one retaining

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this right. However, the interviewees indicated that in all the cases there is usually at

least one cause motivating the termination of an alliance/contract by any of the parties

involved. For example, in the case of the tech transfer office, commonly the contract

specifies that any party can terminate the contract with a 3-month period notice. If that

is the case, the university gets the license and all the intellectual property rights back. In

the case of the contract research and development organization, the contract can be

ended on a bilateral form with 45 days period notice. Some causes to terminate a

contract according to most of the interviewees are: to reach the purpose of the contract

or alliance, to breach the contract by one of the parties, and technological or market

failure. A technology failure refers to the non-satisfaction of the requirements of the

FDA, turning out to be toxic or not helping with the disease in question. Market failure

is the non-acceptance of the product in the market.

In specific, the business developer of the large pharmaceutical mentioned that regularly

his company retains this right since the large company is the one taking the product

through the clinical trials, testing the prospected drug and taking it to the market, having

by this mean the information they require to evaluate to proceed or discontinue the

product to go to a further phase.

Furthermore, the marketing director of the Mexican pharmaceutical commented that the

contracts usually include inside the termination clauses and sub-clauses penalizing the

termination without cause. In some cases, the penalty could include one-year production

costs.

Right to shelve the project

On this right there is such a high contrast comparing the findings of Lerner and Merges

(1998) and the opinions of the interviewees that it can be suggested that in the last

decade the balance in the negotiations has changed toward the small firms. Lerner and

Merges found that in the 93 per cent of the studied cases the financing company

retained the right to shelve the project, whereas the interviewees commented that the

contract regularly includes a plan of execution with defined milestones to meet in time

and resources. If the licensee does not meet the milestones, then the contract can be

terminated by the licensor getting the rights back. In particular, the technology specialist

highlighted that the small firm will usually try to avoid the large firm to shelve the

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project. In the same sense, the business developer of the large pharmaceutical opined

that the small companies want to partner with a company that can continue the process

of development of the technology and not to shelve it. The pharmaceutical company

should have an obligation to market by contract, or in case the technology does not

work, the license goes straight back to the small company. These conditions can be

included in the contractual arrangement, and according to the interviewees, nowadays it

is a common practice used by both the licensor and licensee.

Right of ownership of the technology and its subsequent improvements

This right cannot be straightforward defined without previously delimitate some cases.

The first case is when the small firm has already the intellectual property rights of the

technology previous to signing an alliance with the other company or licensing out such

technology. In this case, all the practitioners agreed upon the fact that the small firm

will retain the ownership unless the small firm sells the technology with all the property

rights.

The second case is represented by a joint research and development strategy in which

the technology is still in process of development, hence no patent involved at the

moment signing the contract. In this case, the ownership could vary presenting different

modes: 1) owned by the firm providing the financial resources; 2) owned by the firm

providing the knowledge, expertise and R&D facilities; 3) owned by the two parties,

also named as co-ownership.

All the practitioners coincided that in the case of simple licensing deals, the party

making the further development of the technology is the one retaining the rights for that

new technology. They also coincided that in the partnership or collaboration modes, the

development or improvement belonged to the party doing such improvement of the

technology. Thus, the party using their own resources is usually the one retaining

ownership for the new development even during the partnership. The same case would

be for the other party. But in cases where the development is made using a combination

of resources of both parties, then the co-ownership is usually the outcome. But then

again, the practitioners tried to save some face arguing that every case is different and it

can vary from deal to deal; and every time there are uncertainty about which party made

the developments, negotiations is the best way to go. It is important to note that this

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decision is also part of the strategy of a company, as the CEO of the Danish company

mentioned that when they collaborate with another party, and they produce new

technologies or ideas, if those ideas are only of business concerns to the other party,

then they permit the ideas go with the that party. When the ideas are of business

concerns to the Danish company and not to the other party, the Danish company retains

the rights over those new ideas. Whereas, when the ideas are of interest of both parties,

then negotiations take place to define who will retain those property rights.

Another element not discussed in previous studies of the intellectual property rights is

the creation and recognition of brands generated during the commercialization of new

drugs and technologies. When the large company licensed in a new technology, it

regularly attaches a brand to that product during the commercialization. That trademark

and brand recognition belongs to the large company, since this is the true value of the

product for the large company. The small company could retain the right for the patent

but the large firm, which invested on the marketing, sales effort and customers, is the

one holding the right over the brand.

Right to patent litigation

When happens when a licensed technology is infringed by a third party? It certainly

affects not only the interests of the licensor but also damages the benefits of the licensee.

But which of the two parties involved in collaboration has the right –or obligation- to

fight the infringer and/or take it to court assuming all the costs required to do so?

According to the answers of the interviewees, this is another right that seems not to

have a fixed rule, and it varies according to each case. For example, the technology

manager of the technology transfer office commented that the university is usually the

one in charge of the litigation, but still it is a negotiable part. The CEO of the Danish

company agrees that the responsibility should be shared between both parties, whereas

the contract research and development organization argues that the owner of the

technology (customer) is the one that retains the right to litigate a patent infringement.

In case of the large pharmaceutical, the business developer declared that they are the

ones retaining the rights since a patent litigation demands a great sum of resources that a

small firm does not count with. The last observation was also shared by the investment

manager, who mentioned that in many cases the small firm will not have the resources

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to take an infringer to court; therefore it will need to negotiate that part with the large

company. Contrasting with all the previous opinions, the technology specialist declared

that even though the responsibility to file a lawsuit against an infringer is habitually

shared between the two parties, the large company will tend to have the first right; while

the small company or the university will take a secondary position. So, if the large

company chooses not to pursue a patent infringement lawsuit, then the university or

small company can assume the responsibility.

Meanwhile, the work of Lerner and Merges indicated that only 25 per cent of the

analyzed cases revealed that the financing company retains this right. It is clear then that

based on the practitioners opinions and previous studies that this right has no a strict

rule or a standard business practice.

Right to delay publications

This right refers to the possibility to oblige one of the parties to not publish, release or

disclose information related to the technology involved in the collaboration. This right

usually works on cases where research and development are still on progress and are the

main part of the collaboration between the parties. It does not apply for simple licensing

since a license has been already disclosed at the moment of its filing. However, it

applies for cases where the licensed technology is being improved by any of the parties

while still in the collaboration process. The companies paying an R&D project will

normally retain this right, since they are providing the resources to execute the

development. When collaborating with a university, the financing company at least

would like to check any information previous to its publication.

Bargaining Power

As aforementioned in the literature review, the bargaining power plays a vital role on

any negotiation. It is said that the party with more power will have the highest benefit

on a collaboration agreement. That is why this concept is relevant in the allocation of

control rights. Some authors measure the bargaining power in terms of the financial

power of the parties, whereas there are others who argue that there are more variables or

factors to consider. Bargaining power is more a latent variable when it comes to

measurement. On this study, the practitioners were asked what are the factors they

considered affect the position of the parties in the negotiation of collaboration

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agreements. Some of the answers coincided that the financial power of a party affects its

bargaining power in comparison with the other one, however they also mentioned other

factors that push up or down the balance of the parties along the process of negotiation.

In the next section you will find a list and description of the factors mentioned by the

practitioners that influence either in a positive or a negative way the position of the

small firm depending on the point of view. Although the order of appearance does not

represent the importance order, all the interviewed practitioners mostly mentioned the

first two as first answers.

Financial power

This is the most common factor mentioned not only by previous studies but also by the

practitioners. A small company, lacking the resources to proceed with the development

of the technology and to build the complementary assets for the manufacturing and

commercialization, turns to financial organizations to access those resources. In most of

the cases the small firm searches not only for financial resources, but also for

complementary assets available by other firms. Moreover, according to Lerner et al.

(2003), in periods characterized by diminished public market financing appear to be

more likely to fund R&D through alliances with major corporations rather than with

internal funds (raised through the capital markets). The internal shortage of theses

resources in the small firm and low external availability of public funding oblige the

small company to look outside the firm, which initially could be seen as a factor

affecting its bargaining power (Lerner, Shane & Tsai, 2003). A support of this argument

is found in the study of Aghion and Tirole (1994), which defines as a determinant of

control rights in an alliance between a research unit and a customer (financing

company) as follows: the greater the financial resources of the R&D firm, the fewer

control rights allocated to the financing firm.

Value and level of breakthrough of the technology

As stated by the technology specialist, the value and potential of the technology

compared to what already exists in the market is of great importance in a negotiation to

allocate control rights. If the technology or discovery is or has the potential to become a

breakthrough in the market, the small company has a strong position in the negotiation

process, whereas if the technology is a simple improvement of what exists on the

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market, then the bargaining position could be minor. An example is the case of the drug

Lipitor®, acquired by Pfizer from Warner-Lambert. Lipitor entered into the market in

1997, and it easily became the market leader controlling around 42 per cent of the

market as of December 1999. The drug, developed by Warner-Lambert and co-

marketed with Pfizer, was so popular for two reasons –it seemed to have been working

rapidly and very good from the standpoint of side effects. This level of breakthrough

increased the valuation of the technology, reason why Pfizer decided to propose a

US$90 billion buyout for taking over Warner-Lambert (CNNMoney, 2000). Certainly,

the bargaining power was on Warner-Lambert’s side.

Furthermore, previous studies have unfolded what determines the value of a patent

using distinct approaches such as the cost-based, market-based, design-based and

income-based, the relief from royalty, the technology factor, the real options and the

Monte Carlo simulation method approaches (Ernst, Legler, & Lichtenthaler, 2010). In

more practical terms, Reitzig (2003) makes a set of measurements to define what

determines a patent value in the semiconductor industry9. Among the elements that

Reitzig evaluates are: technical importance –novelty and inventive activity, which are

related to the technical quality of the patented product; the technical difficulty to legally

“invent around” the patent-protected invention; the portfolio position, evaluating how

the patent serve as a basis for further patents and how many; difficulty to estimate the

proof of infringement of the patent; how much can the competitors learn from the

disclosure of the patent; lifetime; breadth of a patent; uses of functions of patents;

exclusion rights. Reitzig found out that the importance of the patent-protected invention

for current or future technical development plays one of the most important roles as a

value determinant on the seminconductor industry (Reitzig, 2003). Therefore, if the

extrapolate Reitzig’s findings to the biotech industry, it might be inferred that if the

biotech patent supports the development of current and future patents, such as the case

of what is called platform technologies, then the value of that technology increases.

In the same sense, Austin (2008), and Arora and Ceccagnoli (2006) argue that the value

of a license is related to its ability to maintain a barrier to competitive entry to a market,

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the risk and the realization of the value of the product on that market. Austin also

suggests that before entering into full negotiations with a company, it is essential to

establish that the claims made for the asset are both true in the sense of being

represented honestly and that the scientific basis and regulatory requirements have been

satisfied appropriately. A technology complying with these features increases its

strength, so its value (Austin, 2008; Arora & Ceccagnoli, 2006).

It might be suggested that the value of the technology or discovery is affected not only

by a single element, but a combination of them, each one either adding value or

subtracting it depending on the robustness of the technology.

Number of potential licensees

According to the technology manager of the university technology transfer office, when

a small firm has a discovery or technology patented for a niche market where there

could be several large companies that could be interested in that technology and its

commercialization, then the small firm could have an advantage at playing off those

potential buyers. Thus, the small firm could engage in a negotiation with a first

company without reaching a deal, but getting information relevant to be used in a

negotiation with a third company. In the same sense, the technology specialist remarked

that the small firm should always qualify the potential licensees asking some of the

following questions: “why should I license out this technology to you and not other

company?” how can I be sure that your are going to make this technology move forward

quickly and timely fashion at getting into the market to start making money? Justify to

me why I should license this to you.”

For that reason, the small firm needs to do an extensive research on all the potential

licensees, evaluate the best candidates in order to select the best one for the exploitation

of the technology. According to the technology specialist, sometimes the best licensee

for a certain technology happens to be the second best company in the market instead of

a market leader.

On the other hand, when the discovery or technology has only one potential buyer, the

bargaining power is considerably reduced considering the small firm does not have a

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leverage of comparison. Nevertheless, this is not strongly necessary, since there are

other factors influencing such bargaining power.

Jim Camp (2002), an expert on negotiation, recommends collecting information about

the potential buyer or adversaries before engaging on any negotiation, thereby the

company will know their adversaries and their needs, reducing the risk of information

asymmetry (Camp, 2002).

Pressure of patent cost

The cost of filing and maintaining a patent can be a burden to a small company.

Whereas filing a domestic patent can cost up to US$20,000 in patent and legal fees, a

worldwide patent right can take up to US$100,000, without considering the expenses

along the patent process depending on the complexity of the technology. Even when a

company has the resources to pay for maintaining the patent fees, the goal is the

commercialization of the technology to get the expected revenues. As stated by Teece

(1992) “Innovative products will not yield value unless they are commercialized”

(Teece, 1992). This factor is strongly linked with the lack of financial resources of the

company, though the main purpose of any innovative company is the commercialization

and not the mere maintenance of their technologies.

For the case of the university, where the main purpose is the licensing of its discoveries,

the burden of the patent cost is an important issue that puts under pressure the institution

to reach deals with the private sector somehow.

Time to market and opportunity cost

A patent has a time period of 20 years after its filing date. Once a potential drug has

been discovered, the small company will apply to get a patent, but that does not mean

the discovery or technology is ready to be commercialized. It still needs to get through

all the process of proof of concept and clinical trials. In the case of drug development,

in the United States, it takes an average of 12 years for an experimental drug to travel

from the laboratory to the medicine cabinet (MediciNet.com, 1999). Thus, this situation

leaves the small company with a constraint of time of around 8 years to fully exploit the

patent and obtain the revenues from the market. Once off patents, sales from the

technology will sharply drop because of competition from cheaper generic (Malik,

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2009). For this reason, the more the small company delays the time to market, the

higher the opportunity cost it bears. The race for the market presses on the small

company to look for alliances with better-positioned companies, putting the time to

market and the opportunity cost against the patent owner.

Some studies suggest ‘increased speed to market’ as one important benefit of inter-firm

cooperation (Grant & Baden-Fuller, 2004; Teece, 1992). Though Hoang (2006) found

out that from the point of view of the large pharmaceutical, there is not statistically

significant difference between the speed to market of collaborative biotech projects and

biotech project conducted alone by pharmaceutical companies begun at early stages of

the process (Hoang, 2006). From the point of view of the small company, the speed to

market is accelerated in a collaboration project with a large company, since the small

company does not count with the complementary assets required to access the market in

a fast manner.

Lack of complementary assets

This is one of the main factors that take a small firm to look for inter-firm collaboration

agreements with other companies, and it is strongly linked with the lack of resources

and the restraint of time to market. The development of the necessary complementary

assets takes time and resources, elements that are not usually on the side of the small

firm. The experience curve could be extended depending on the type of technology,

existing competition, barriers of entry, market structure, among other elements. Mostly

all the interviewed practitioners mentioned this factor as a disadvantage of the small

firm affecting its bargaining position.

One of the strengths of the large pharmaceutical is found on its complementary

technologies, competitive manufacturing, reputation, commercialization muscle,

domination of market channels, service, and after-sale support. The profitable

commercialization of technology requires timely access to those complementary assets

in competitive terms (Teece, 1992). This factor becomes more critical for the small firm

when a successful commercialization of the innovation may depend critically on a

bottleneck asset that has only one possible partner, downgrading its bargaining power in

a negotiation.

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Small number of research suppliers and specialization

Another factor that affects the balance of the bargaining position of the research

suppliers is the number of them available on the market with similar capabilities,

technologies and discoveries. For example, if there are several companies investigating

drugs for skin cancer, a large company can approach several of them to play them off to

get better deal. This is a reverse case when there are several potential licensees for a

technology owned by a single small company, situation that gives more negotiation

power to the latter. Thus, the small company can negotiate deals with more than one

company and play those companies off (Caves, Crookellandj, & Killing, 1983). The

business developer of the large pharmaceutical commented that the competition is

important to benchmark prices offered by R&D suppliers. Contrasting with this

asseveration, a study by Bakos and Brynjolfsson (1993) in the information technology

sector concluded that instead of playing off dozens of competing suppliers against each

other, many firms are finding it more profitable to work closely with only a small

number of partners, focusing on the critical importance of providing incentives for

suppliers, thereby reducing search costs (Bakos & Brynjolfsson, 1993).

The CEO of the Danish company remarked that two of the factors that give his firm a

good balance in the negotiation power is the network of relationships and the level of

specialization of the discoveries and technologies, assets not so easy to find in other

competing suppliers. The same case was pointed out by the business developer of the

Mexican contract research and development organization, who responded that the

connections the company has in the health industry, the level of expertise in terms of

regulation and technology knowledge give to the company positive points in the

negotiation balance.

Expertise and market knowledge (market power)

This is a factor, commented by some the practitioners, related to the time to market and

complementary assets. A large company will have the access to the market through its

different tentacles of its structure created through the years and resources. The access to

market is based on the domination of channels, contacts with stakeholders, reputation,

market knowledge, and financial resources that give the large company the impetus and

power. These tangible and intangible assets are the necessary complements that a small

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firm needs to progress downstream in the value chain and obtain the sought revenues of

its discoveries and technologies. Grant and Badent-Fuller (2004) argue knowledge

accessing is the primary motivation for knowledge-based alliances, which help increase

their knowledge specialization of both firms (Grant & Baden-Fuller, 2004). Therefore, a

strong need to access the expertise and market knowledge of the large company to fully

exploit the discoveries of the small firm may at the same time affect bargaining position

of the small company in the negotiation process.

Negotiation skills

Negotiations skills are rarely cited by researchers on the set of factors influencing the

allocation of control rights. However, the negotiation skills may be crucial elements

during the negotiation process. Cellich (1993) suggest that executives of small and

medium firms often lack the required business negotiation skills (Cellich, 1993). And

Austin (2008) explains that the subject of negotiations involves discussion of techniques

including social psychology, games theory and personality (Austin, 2008). No matter if

the technology is a potential breakthrough in the market, if the small company owning

the patent does not have or include in the process of the alliance the negotiation skills,

the firm might let go the value immersed in the technology.

As the investment manager states: “if you are an experience deal maker, you are more

likely to strike a good deal, for that reason, the business developer plays an important

role in the negotiation process and is a key person to the biotech company. A biotech

company, aiming at getting the most out of its main asset, needs to include experienced

business development people in the firm.” In many cases, the business developer

negotiating a deal is hired by the firm as an external consultant, who will be in charge of

the negotiation process. In many other cases the business developer or negotiator will be

part of the staff of the small firm. Nevertheless, any business developer or negotiator

not only is required to have great negotiation skills, buts also to have a broad knowledge

and expertise on the field of the technology in question.

Final thoughts about bargaining power

Finally, based on the factors described above that influence the bargaining power it

might be inferred that there is no a single factor driving all the negotiation power of a

company, but a set of factors that work jointly, each one having their own positive or

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negative load on the bargaining power. Moreover, there might be other idiosyncratic

factors that were not mentioned by the interviewed practitioners important that apply to

particular negotiations and on a case basis.

Risks

As part of any transaction, come risks. Those risks, as defined in the literature review

section, could be based on opportunistic behavior of any party on an alliance or

licensing agreement, or by failure of a project due to other circumstances not based on

opportunistic behavior. In this section, a summary of those risks commented by the

practitioners is provided complementing with extant theoretical literature.

Risk of collaboration becoming out of strategic focus or shelve of

project by the large company

Any company licensing out or being part of a strategic alliance can be harmed by the

behavior of the second party, when the latter decides that the project is no longer a

strategic focus, therefore reducing the flow of important resources (i.e. financial

resources and capabilities) to continue supporting the project or even stopping

completely the project and shelving it. This might be due to other products in the

pipeline of the large company producing better results and/or demanding more

resources obligating to cannibalize the collaboration project with the small company. It

might also be due to an increase on the competition with better products. The survival

of the small company could depend heavily on one or just a few main technologies,

whereas the large company usually sustains a pipeline of products from which it

extracts the necessary revenues. This situation endangers the survival of the small firm,

which depends on a short pipeline, and especially when it has made specific

investments. Similar is the case of the university, even though its survival does not

depend strongly by the sale of its licenses, it also runs the risk of opportunistic behavior

(hold up) (Goldberg, 1980) by the licensees when trying to stop or shelve technologies

acquired from the university’s research centers. According to the business manager of

the university tech transfer office, the main risk of collaboration with a big

pharmaceutical company is that the collaboration becomes out of strategic focus

meaning that funding and/or development is discontinued. For the case of the small firm,

if the large company has the right to shelve the project or simply stop the flow of

resources for change in strategic focus (hidden intention), then the small firm suffers the

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hold up problem if it has made specific investments on the technology and the contract

does not specify how to safeguard this problem (incomplete contracts) (Hart & Moore,

1999).

Use of small firm’s disclosed information by the large company to

infringe, invent around or become a potential competitor

As discussed previously, a small firm is usually constrained by resources weakening its

position when it is required to respond investing resources to defend its assets against

potential infringers. Furthermore -as the technology specialist declared-, if the large

company in the alliance infringes the small firm’s patents, the latter will not be able to

respond to battle for its rights if taken to court. When collaboration is signed and

executed, there is a transfer of information and knowledge that could be key to the other

partner to use in its own favor. The disclosure of secret information and the risk of

second-order diffusion (Hill, 1992) about the technology could lead to opportunistic

behavior (hidden intention) of the other party, which could use the information to invent

around the patent, infringe the technology or become a potential competitor (Helm and

Kloyer, 2004).

Profitability risk

Any collaboration and licensing project are also affected by the profitability risk (Helm

& Kloyer, 2004). The marketing director of the Mexican pharmaceutical pointed out

that one of the biggest risks when dealing with collaborations in the drug development

business is that the uncertainty produced by the lack of market information and potential

uses of the drug could lead to the small firm to license out, sell and lose rights of its

technology to large companies which could further develop and commercialize it, and

produce a blockbuster leaving the small firm with a low participation on the share of

profits. R&D alliances are often marked by high levels of uncertainty and frequently

require participants to invest in transaction-specific assets (Dickson, Weaver, & Hoy,

2006). A weak deal could leave the small company with a very small portion of the

gains, and the large company enjoying the business of its life with a blockbuster

technology. This problem could be present especially when the large firm has more

information about the business opportunity and the market, and it manages to strike an

advantageous deal with a less informed partner, e.g. defining a low payment or low

royalties for the technology, and after further development and commercialization, the

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large company extracts a bigger portion of profits from the market (hidden intention due

to information asymmetry).

Risk of project failure or investing without desired results

This is a risk not based on opportunistic behavior, but externalities such as market or

technology failure. This is also known as risk type II, which accounts for the possibility

and the consequences that the objectives of inter-firm alliances are not successfully

achieved, although all partners cooperate fully (Das & Bing-Shen, 1986). As stated by

the CEO of one of the Danish companies -“the major risk is investing without result”. A

drug candidate could not provide the desired results on patients causing the rejection

and writing off the project. As mentioned previously, the chances that a drug entering

the discovery stage of the process will fail to go through FDA approval is over 90 per

cent (Tyebjee & Hardin, 2004).

Furthermore, it is important to note that there might be other risks mentioned in the

extant literature but not by the practitioners in an explicit form, though they could be

part of the commented risks. Some of them are, for example, the competitor creation

risk, selection of weak partners, use of resources for other purposes, and others.

Strategies to Mitigate or Reduce Risks

Well written contracts

The best mitigation or reduction of risks based on opportunistic behavior, according to

most the practitioners interviewed is the construction of well written contracts that

contain clauses to protect the interests of both firms. Literally, the technology specialist

stated -“a strong, well written license is the biotech firm’s best protection”.

The technology manager of the university technology transfer office also suggests that

the small firm should build agreements that, in case of breach or termination, should: a)

enable to have project assets (intellectual property, instruments, know-how) returned to

the owner of the technology (small company or university), so it can partner with

someone else; b) ensure sufficient termination periods to find alternate funding for the

projects; c) ensure that agreements do not stop the owner from working with someone

else (i.e. no competition clauses) and; d) in specific for the university case, ensure that

any funding for PhD students is secured and continue to be paid regardless of

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termination of agreement. One practitioner commented that a common strategy used by

his company is to have the contract guaranteed by bank to protect against failure of

payment by the other party.

These strategies supports what Helm and Kloyer (2004) established in their paperwork,

arguing that contractual provisions can reduce exchange risks perceived by R&D

suppliers (Helm & Kloyer, 2004).

Openness to renegotiation

Another feature of these contracts is the possibility to renegotiate as the collaboration

evolves to redefine conditions, responsibilities and benefits for both sides of the

agreement (Reuer & Ariño, 2002). A door open for renegotiation could better the

position of the small firm if the large company finds out that the licensed technology

could become a blockbuster and produce large profits, hence reducing the risk of

profitability.

One more feature of a good contractual practice to reduce risk of profitability is to

include incentives such as royalty-based milestones, according to the marketing director

of the Mexican pharmaceutical. As the development produced by the large company on

the small company’s technology moves further and offers a clearer vision of the market

potential, then the royalty rate may increase.

Alliance management

Sadowski and Duysters (2008) posit that most reasons for strategic alliance failure have

their origin in a badly managed partnership, which no trust and goodwill is created

between the partners involved (Sadowski & Duysters, 2008). As a response to manage

the increasing number of alliances, the large companies have been obliged to improve

their alliance management capabilities, defined this as ‘the firms ability to effectively

manage multiple alliances’ (Rothaermel & Deeds, 2006). In many cases this situation

has led firms to create inside their hierarchical organizations ‘alliance management

teams’ or to appoint dedicated ‘senior scientists’ for research collaborations. These

figures are in charge of monitoring, executing and bringing in the required resources to

accomplish the tasks for the project.

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It is important to note that the relevance of this management problem has led to the

existence of a great deal of consulting companies specialized in alliance management.

Additionally, large firms like Amgen, Pfizer, Johnson & Johnson, Eli Lilly, Bayer,

Novartis, GlaxoSmithKline and others include in their websites explicit information

about the use of alliance management along the duration of partnerships. An example of

this is Amgen, which describes the alliance management as a “mechanism between the

representatives of both parties to work across all functions to establish project

objectives and decision-making procedures before research or project work begin on the

program. As the project gears up, the alliance management works to ensure that

questions are channeled quickly through the company’s law, licensing, corporate

communication, and finance and information services department, as needed. It is also

in charge of identifying and resolving issues that might otherwise strain the relationship,

and ensuring consistent and transparent interactions across the project team” (Amgen,

2011).

Even though this mechanism might represent coordination and monitoring cost for both

parties, literature shows that the management of alliances play a crucial role in securing

the success of partnering (Ziegelbauer & Farquhar, 2004; Rothaermel & Deeds, 2006),

keeping the project inside the right track without losing control over the development

process, and reducing the risk of opportunistic behavior of both parties. Dyer and Kale

(2001) highlights four roles that a dedicated strategic-alliance function performs: it

improves knowledge-management efforts, increases external visibility, provides internal

coordination and eliminates both accountability problems and intervention problems

(Dyer & Kale, 2001).

The alliance management function is also in charge of defining a clear plan setting up

goals, responsible staff, time, schedule, knowledge, resources and in general

deliverables to be provided by each party in the collaboration.

Robust due diligence

Due diligence analysis was mentioned by some of the practitioners as a factor to reduce

risk in a deal. Even though the due diligence process might be a function of the alliance

management defined for each project, it is worth to mention it apart. A due diligence is

a management practice commonly performed in the biotech industry and its main

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purpose is to conduct an investigation of a business before signing a contract. A robust

due diligence, by both parties in a negotiation, permits the small and large firms to

extract the required information they might need in a future negotiation. Though any

due diligence demands resources and search costs, if it is well defined and executed, it

might save future dollars. A due diligence is a practice to acquire information to reduce

bad making-decision processes, and information that could potentially lead to

opportunistic behavior afterwards.

One of the main emphases in a due diligence process is the analysis of the intellectual

property rights involved, essentially when the transfer of technology is the purpose of

the collaboration. Hantos (2010) states that a noticeable trend has emerged within the

patenting arena in which those seeking to acquire, license or invest in patented

technology are asking more focused and detailed questions in order to assess whether

commitment is warranted (Hantos, 2010). Parties confront a variety of risks having the

potential for reducing the value of the deal. Through due diligence, parties open up

information to one another so that they can identify and minimize those risks. Due

diligence analysis is an investigation of three major issues. First, ‘ownership’ -are the

intellectual property rights owned by the appropriate party? Second, ‘use’ -can the

technology covered by the intellectual property rights be used, or is it dominated by

patents belonging to others? Third, ‘transfer’ -does the party offering the intellectual

property rights have the lawful rights to do so? (Sonnenfeld, 2001). It is important to

inspect all !les regarding patents, trade secrets, and copyrights, as well as license

agreements, con!dentiality agreements, joint venture agreements and other type of deals

(Silverman, 2004). These recommendations agree with what the investment manager

explained during the interview –“they want (large pharmaceutical companies) to be sure

that the rights are placed in the small company, or at least that they can go back to the

license source, the university, and say -“Is it true that you have licensed the rights to this

compound to this small company, which we are now interested in buying?”- So they

want to check a lot of things to make sure that they legally will also own the rights to

the products. And that is part of the due diligence.”

By identifying as many facts concerning these issues as possible during due diligence,

both parties increase their level of security and the probability of a successful closing on

a valuable deal. But it also helps the value of the technology of the small firms if during

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the due diligence the potential buyer/licensee finds out that the work has been done

properly by the licensor.

The next figure 8 displays succinctly the list of the risks and their mitigation strategies

commented above.

Risks Collaboration

gets out of

focus or shelve

projects

Use of disclosed information

by large company to

infringe, invent around or

become a potential

competitor

Profitability

risk

Risk of project

failure and

investing

without result

Mit

igat

ion

Well written

contracts ¤ ¤

Openness to

renegotiation ¤ Alliance

management ¤ ¤ ¤ ¤

Robust due

diligence ¤ ¤ Figure 8. Potential risks and their mitigation strategies proposed by the interviewed business practitioners.

Own creation.

Thus, a well-written contract could help reduce an opportunistic behavior by any of the

parties including clauses that could avoid fine holes in the collaboration such as

possibility to shelve projects, misuse of acquired information, inventing around the

patent, or becoming a competitor in the near future.

Meanwhile, a good practice to include in the contract is the possibility to renegotiate a

deal, which might leverage the danger of profitability risk that affects mainly to the

licensor or owner of the technology. The opportunity to negotiate terms and conditions

such as royalties in case of an increase of a market of the technology could serve as an

incentive to the small company or owner of the technology.

An alliance management team offers to help all the risks above mentioned. The

management of an alliance allows firms to keep the collaboration close, detect potential

threats to the projects and define rapid solutions, increase trust between the parties,

identify potential opportunistic behavior and other externalities and contingencies, and

act in response.

Finally, a robust due diligence conducted by both parties in a negotiation provides

information in order to reduce uncertainty, therefore reducing opportunistic behavior by

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one side of the table when defining the market size, royalties, and future profits. Also, it

helps to evaluate and estimate the viability of the project, or possibly its failure due to

lack of information.

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CONCLUSIONS AND FURTHER RESEARCH

This thesis shows a qualitative study on which are some of the commercialization

strategies used by companies in the biotechnology field, how the most common control

rights are allocated in a negotiation between those companies, the factors influencing

the bargaining power during the negotiation process and some potential risks perceived

by the business practitioners during the agreements.

The study relies first on secondary research doing an analysis of extant literature, which

helped to create the required framework for the research. Later on, as primary research,

a series of eight semi-structured in-depth interviews was conducted with business

practitioners in the biotech field ranging from a technology manager of a technology

transfer office to business developers of pharmaceutical companies, also including chief

executive officers and marketing directors and consultants of small biotech companies.

Several points of criticism can me made. First, the review of literature is built upon

analysis of prior art, which at the same time bears a load of relative validity and

reliability concerns. Second, the number of interviews was limited. Third, the

interviewee might not express entirely their real opinions and point of view in order to

hide confidential information. Fourth, the interviewees perform unequal positions in

different companies/organizations in the biotech field, situation that affects the

possibility to generalize the results to all the cases in the biotech business field.

With respect to the commercialization strategies, the primary findings agreed with the

theoretical literature in terms of the increase on collaboration strategies implemented by

both small and large companies in the biotech sector, being among those strategies the

use of licensing deals and R&D partnerships and alliances the most used by those

companies. Some of the reasons mentioned to explain this phenomenon are the scarcity

of resources in the small company to continue with the development and/or

commercialization of its technology or discovery, whereas the large company is tending

to search for new technologies outside its walls, commonly buying technology, allying

with small companies and universities or acquiring entire companies if it makes more

business sense. Licensing is the most common deal; whereas companies trying to

develop their own capacities for future developments and commercialization

capabilities absorbing knowledge from the partner seek partnership and alliances.

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Regarding the allocation of control rights, most of the practitioners agreed that there is

not a fixed or standard rule on how to distribute the rights, however there are some

common practices observed in the field. For example, a large company usually tries to

retain the rights to manage clinical trials, manufacture and market the product, since

these are the reasons why they search for technologies and how they make money.

Together with this, the large company will also ask for exclusivity in certain markets.

All of these primary findings are in accordance to the findings provided by Lerner and

Merges (1998).

Moreover, the right to sublicense will be retained by the large company, but usually

paying royalties for sublicenses to the owner of the technology. The right to terminate

contract or alliance is commonly included in the contract as a possibility for both parties

in the agreement, always requiring to indicate the cause of termination with a previous

notification. In some cases, a penalty fine is levied on the party terminating the contract.

With respect to the right to shelve a project, some of the comments by the practitioners

are that the owner of the technology will normally try to partner with a company that

has the intention to continue the development and commercialization of the technology,

and that the large company should have an obligation to market by contract, otherwise

the license should go back to the owner of the technology. This finding contrasts

strongly with Lerner and Merges’s, where 93 per cent of the large or financing

companies retain this right.

The original owner of a technology will commonly keep the right to ownership of that

technology, whereas subsequent developments inside an alliance will vary. If one

company made solely an improvement, then the right may belong to this company.

However, if the improvement used resources from both parties in an agreement, though

it can vary from deal to deal, then both parties share the property through a co-

ownership form. Regarding the right to delay publication, a financing company will try

to retain this right or at least to reserve the right to review any information previous to

be published.

Regarding the analysis of the bargaining power, it is important to note that most of the

previous studies include the financial power as the only factor affecting the balance in a

negotiation. Nevertheless, the results of the interviews show that there could be more

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factors such as: 1) value and level of breakthrough of the technology; 2) number of

potential licensees; 3) pressure of patent cost; 4) time to market and opportunity cost; 5)

lack of complementary assets; 6) small number of research suppliers and specialization;

7) expertise and market knowledge (market power) and; 8) negotiation skills.

Finally, the main concerns of the business practitioners with respect to risks when

collaborating with other companies are: 1) one of the parties shelves the project or

declares it out of strategic focus; 2) use of disclosed information to infringe, invent

around or become a potential competitor; 3) profitability risk and; risk of failure or

investing without desired results. In order to mitigate these risk, the business

practitioners highlighted the importance of having well written contracts -with openness

to renegotiate-, building a strong alliance management team that follows up the

collaboration process and conduct a robust due diligence by both parties previous to

signing any collaboration agreement to reduce information asymmetry and increasing

the chances to make better decisions.

Further Research

With respect to further research, the thesis hints at the need to carry out a more

extensive analysis of the allocation of control rights increasing the quantity of

interviewed business practitioners in similar positions and firms improving the

possibility to generalize results. Also, it is recommended an updated and improved

version of the empirical work of Lerner and Merges (1998) considering more factors

other than merely the financial power as variables affecting the bargaining power in a

collaboration strategy. It also suggests investigating deeply on the factors influencing

the selection of commercialization strategies by small biotech companies and large

pharmaceutical companies.

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APPENDICES -

Appendix I – Profile of interviewees

Appendix II – Summary of Interviews

Appendix III – Interview Transcripts

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Appendix I

Profile of interviewees

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Appendix I Profile of interviewees Page 1 of 2

1. Business Developer of a Danish university technology transfer office.

Experience project manager in all aspects of a public research university's IP

commercialization effort including: Scouting, patenting, market research, presenting

technology opportunities to industry, negotiations and IP portfolio management.

2. CEO of a small Danish platform technology company for biotechnology

research purposes

With more than 8 years of experience as CEO leading a platform technology company,

negotiation research alliances and managing innovation within the firm.

3. Business Developer Manager in a small Mexican contract research and

development company

Experienced business developer specialized in medical devices and outsourcing, with

working experience in product design and development, project leader, trademarks,

patents, training, managing people, technical support about biomedical equipment, sales

of service, handling with worldwide costumers and very creative. He is also in charge of

negotiating agreements with customers and follow-up of projects.

4. Investment Manager in a Danish seed investment organization for start-ups

Extensive experience from the pharmaceutical and biotechnology industries, he assists

medical equipment and biotechnology companies with advice about the establishment,

further development and commercialization of their business ideas, using his medical

background in the daily dialogue about the use and development of the products and in

the assessment of new business ideas in the field of Life Science.

5. Technology Management Specialist in the U.S.

Specialized in taking innovative technology to a commercial product with extensive

experience on patent/copyright protection, technology assessment, market research and

analysis, prototype development, technology testing and validation, and product launch.

His background is based on his PhD. in medicine and performing leading position in

technology transfer offices and clinical research centers. Currently he serves as a

consultant in the fields of technology transfer and commercialization with start-up

businesses, established companies seeking new innovative products, NIH

commercialization assistance program for their SBIR recipients, and others.

6. CEO of a small Danish biomedical (diagnostic kit) company

With a life science background and Ph.D. degree, and strategic and operational

experience from sales and marketing of medicine on local and international level. Also

with an extensive experience in acquiring and disseminating scientific information and

negotiating agreements with national bodies in Denmark.

Business developer of a large pharmaceutical company

Life science and licensing professional with more than 15 years postgraduate

experience in academic research and pharmaceutical industry with specialties in drug

discovery and development, pharmaceutical licensing, scientific due diligence and

cardiovascular diseases. He is currently responsible for prospecting R&D and business

development opportunities.

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Appendix I Profile of interviewees Page 2 of 2

7. Marketing director of a Mexican pharmaceutical company

13 years of experience in the pharmaceutical industry as product manager, marketing

director, group manager, business unit manager. Currently working as marketing

director of a pharmaceutical company for Mexico and Latin America.

-

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Appendix II

Summary of interviews

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Appendix II

Summary of interviews

Appendix II - Summary of interviews Commercialization Strategies of Research Providers and their Realization in the Negotiation Process

Page 1 of 8

University Technology Transfer OfficeDanish Platform Technology

Company

Mexican Contract Research and

Development OrganizationDanish Pre-Seed Investment Organization

Technology Management Consulting

Company

Interviewee's Position Technology Manager Chief Executive Officer Business Developer Manager Investment Manager President

Case University vs. small or Big Pharma Small company vs. customers Contract R&D company vs. customers Small biotech vs. Big Pharma Small biotech vs. Big Pharma

Interviewee's point of view University Small Company Contract R&D company Small biotech Small biotech

COMMERCIALIZATION

STRATEGIES

The university usually licenses out and conduct

research collaboration with the private sector.

The company perfomrs direct

commercialization of own producs and

research collaboration with scientific

community.

The company performs outsourcing of R&D

services (biomedical design, software,

electronic)70%.

-Incubation 30%.

-Consultancy services (business plan, fund search).

The strategies of a small company focus on the

development, proof of concept, sale of the company or

sale of licenses if the product can be used for more than

one indication. In few cases, they will be able to

develop the product to the very end.

LicensingThe university usually license out its IP to the

companies.

In most of the cases the small company will use this

strategy, specially if the product can be used for more

than one indication.

This is the most common strategy of Big

Pharma.

Partnerships and AlliancesThe company is currently practicing this

strategy in a joint venture.

If the Big Pharma has gained interest in a small

company, and not only in a specific compound, Big

Pharma could establish an alliance with the small firm

and use it as a feeder of more products into their

pipeline.

Sell technology / company

A company will be acquired in some cases when it has

in the portofolio other products of interest to the Big

Pharma.

Direct commercialization Main focus of the parental company.The company has only a few cases through the

incubation services

Just in few cases, the small company will be able to

develop the product to the very end (including

commercialization).

Collaborative R&D This is a strong focus of the University.

Informal in the parental company, a lot of

collaboration primarily with the scientific

community. The company has a standard way

of doing things: invite people to come with

their research problem, or they might require

the equipment to do it. Formal contracts

required in a subsidiary company due to

regulation.

Collaborative research through outsourcing

services in medical device design and

development.

CONTROL RIGHTS

Manage clinical trials The company (licensee) keeps this right.

The company manages the clinical trials but

because it offers the services to do this for products

not belonging to the company.

It is based on negotiations, Big Pharma will do it mostly

by themselves, even repeat some clinical trials the small

has performed. But in some cases if the small company

has the competences, the Big Pharma will trust it to run

clinical trials.

Big Pharma will retain this right.

Process developmentThe company participates in some phases of the

development.

In many cases the Big Pharma just buy the rights with

the proof of concepts and they just continue the

development.

Process development is really done primarily

by the pharmaceutical company, and that is

very standard, usually is not even discussed in

an licensing arrangement.

Manufacturing The company (licensee) keeps this right.The company keeps the right for their own

products.The company does not participate on this phase.

Big Pharma will want to get all the rights of the product,

including the right to manufacture, process which can

be patentable too.

Big Pharma retains this right.

Appendix II - Summary of interviews Commercialization Strategies of Research Providers and their Realization in the Negotiation Process

Page 2 of 8

University Technology Transfer OfficeDanish Platform Technology

Company

Mexican Contract Research and

Development OrganizationDanish Pre-Seed Investment Organization

Technology Management Consulting

Company

Market universallyThe company (licensee) keeps this right but only in

the field of use.

The customer keeps this right, since he/she usually

owns the patent we are working on.

Big Pharma will want the right of the product including

the right to market the product.

Big Pharma tries to retains this right since this

is the whole idea of acquiring a license. This is

what they do, because this is where they make

the money.

ExclusivityThe company gets exclusivity but limited or in field

of use.It is variable, based on negotiation.

Big Pharma will ask for exclusitivty, specially for a

particular indication of the compound (e.g. cancer).

The small company and university will license

out all the rights to the Big Pharma withing a

given field or worldwide rights. Though these

rights can be very variable.Big Pharma will

want exclusive rights in Europe and U.S.

Terminate contract w/no cause

The company (licensee) with 3-month period notice

can terminate. The university gets the license back.

But if the company is in breach, then the university

can terminate.

This right is bilateral agreement, usually

considering 45 days notice.

Termination is based on defining if the technology

worked, if not, the finish the contract.

Sublicence

The company can sublicense the technology at any

moment, though the university usually wants to

control part of this.

The customer as owner of the patent decides what

to do.

The university will usually say: if you sublicense to

somebody else, we will have income from your

sublicenses.

Negotiable. Usually a licensor can specify in

the contract that the licensee should sublicense

to other company in a period of time.

Shelve projectsOnce the company decides not to use the license, the

university gets it back.

The customer as owner of the patent decides what

to do.

Negotiable, usually the small company will try

to avoid the customer to shelve the technology.

Ownership of technology The university retains this right.

If the company generates something in the

collaboration with other company ideas, it

belongs to our company if we are interested in

the technology. Otherwise it can co-own it or

just let it go.

The customer is the owner of the patent except

when the company offers the incubation services,

the company could participate in the ownership.

If in an alliance, it will most likely be specified in the

alliance contract that if both companies share

competences, knowledge, people that worked together,

any future inventions will be co-owned by both.

It will be retained by the small company or

institutiones developing the technology.

Patent litigationUsually the university keeps this right, but it is

negotiable.

Both parties will have the right, though they

have not had any case so far.The customer as the owner of the patent.

Usually the owner of the patent will litigate the patent,

thoug the small firm lacks the resources.

Big Pharma will have the first right to protect

the IP, whereas the small company and

university will take a second place in case the

Big Pharma does not want to sue an infringer.

They share the responsibility.

Delay publicationsOnly in sponsored research, the sponsor could ask to

omit some info and delay publication.

You need to let scientist be scientist, except

when the customer is paying in an

collaboration, then the scientist does not

publicize

In deals with the university is acceptable only

with minor delays. Big Pharma will want to

review the content of the publication

beforehand.

- Usually the university or the biotech firm will

file a patent immediately that is why the

publication will not be an issue.

Ownership to improved

technologyIt belongs to whom makes the improvement.

Owned by the one making the improvement. No fixed

rule, it is based on negotiations.

Tise right usually belongs to the one making

the improvement, but sometimes co-

ownership is agreed.

Appendix II - Summary of interviews Commercialization Strategies of Research Providers and their Realization in the Negotiation Process

Page 3 of 8

University Technology Transfer OfficeDanish Platform Technology

Company

Mexican Contract Research and

Development OrganizationDanish Pre-Seed Investment Organization

Technology Management Consulting

Company

BARGAINING POWER

Possitive factors

-Number of potential licensees (the more, the

stronger the position of the university).

- Level of data .

- Reputation of the academics assures good

technology (strong position of the university if good

researchers).

- Usually the university and company apply for co-

financing once the tech has been licensed (university.

not hurry to apply for money).

- The university is not dependent on license payments

(hence strong position).

They have the knowledge and generate a lot

of ideas

-Small number bargaining

-Better connections to the researchers and

customers

- Reputation

-The company offers an integrated service.

-Knowledge of the market and regulations.

-Low competition.

-Linkage with institutions (governmental,

academic).

-Relationships and network.

Experienced licensing business development people

(good deal makers).

- Value and potential of the technology

compared to what already exists in the market. -

Importance of the technology to the buyer.

- Number of potential licensees, competitors

between them.

Negative factor- University is forced to commercialize by regulation.

- Pressure of patent cost.In general the company does not feel weak.

-Distance to customers.

-Customer doubts about the quality for offering a

broad range of solutions.

Lack of resources.

- Small company lack of resources.

- A weak patent

-Small company needs to prove the data to

support the product will go all the way to

market.

Risk: Collaboration becomes out of strategic focus

meaning funding and/or development is discontinued.

Risk: investing without result.

Mitigation: We depend much on time for

initial definition of goals and roles.

Risk: breach of contract.

'Mitigation: It is important to clauses in contract

with sanctions in case of breach.

Risk: loss of control over the development process.

Mitigation: make sure that the development process is

an integrated part of the R&D process.

Risk: Biotech companies are cash poor and if

Big Pharma infringes on the biotech patents, it

will cost big money to defend those patents,

money most biotech companies do not have,

even though the biotech company might be

legally correct, they may not have the $$ to

defend their patnets. And there are other

situations that inadequate cash might be

disadvantageous to the biotech company and

put it at risk.

Mitigation: the license must be well written

and very thorough in addressing all the

important issues. If it is not a strong license,

big pahrma may find loop-holes that allow it to

violate certain things in the "spirit and intent"

of the license.

Mitigation: constructing agreements that a) enable to

have project assets (IP, instruments, know-how)

returned to the university so we can partner with

someone else, b) have sufficient termination periods

to find alternate funding for the projects, c) do not

stop us from working with someone else (i.e. no

competition clauses) and b) assure funding for PhD

students to be paid regardless of termination of

agreement.

'Upfront payments for established companies.

Royalties on manuf. and market on strat-ups.

Risk: get a negative viability outcome in the R&D

analysis, provoking in the customer's perspective a

bad reputation of our company.

Mitigattion: constant communication with the

customer.

Risk: failure from our providers to proceed with

the project.

Mitigation: communication with customer

Risk: Big Pharma licenses in the technology

and then puts it on the shelf and never tries to

commercialize it.

Mitigation: The license must address this issue

by stating that if the company fails to make

substantial progress towards

commercialization (and list milestones), the

technology will be returned to the biotech

company.

RIS

KS

AN

D M

ITIG

AT

ION

Appendix II - Summary of interviews Commercialization Strategies of Research Providers and their Realization in the Negotiation Process

Page 4 of 8

University Technology Transfer OfficeDanish Platform Technology

Company

Mexican Contract Research and

Development OrganizationDanish Pre-Seed Investment Organization

Technology Management Consulting

Company

Risk: to work on a R&D project similar to a

previous one with another customer, interest

conflict arises.

Mitigation: avoid this kind of projects, or work or

very different ones

Risk: accept project out of the capabilities of the

company

Mitigate: communication with the project

Risk: increase on the cost due to an increase on the

price of materials or any other external economical

factor

Mitigation: budget each material in a separate form

Some clauses in the contracts are standard, but it is

not a binding agreement. It is specific to each case.

The company started using a 'Network

Strategy' to increase the quality of ideas.

The customers require the outsourcing of the phase

they are not specialized in

Biotech companies usually won't be able to take a

product to the market.

Inhouse research has been declining over the

past decade. Companies approaching Univ and

other companies

The university hasan insurance indemnification and

clauses for product liability. The responsibility of

using the technology will be of the company , not the

university.

Company can not pursue all the ideas. Only

for the best ideas we file patents.

Genentech, Amgen and Genzymne started as biotech

companies, then they turned into full fledge biopharma

companies. Very few have done this.

Pharmas need to be sure the patent is clean

Without patents in Medtech or Biotech you

are lost.

After the proof of concept, the tech increases its value.

Even better after the proof of principle.

Evaluations of the technology and market to

negotiate the license

Trade off - openess and size, the larger you

are, the more you have to protec your idea.

We are small, we gain a lot from being with

an open interaction with al lot of researchers

all over the world.

Pharma will pay upfront for proof of concept product,

then they define a first right of refusal to pick the

product if it works (option to buy it).

There is no such thing as a standard contract

for this type of thing. Because of the kind of

product, the applications, the different markets

they can go, a lot of things like that

Big Pharma practices due diligence to decide the best

strategy to acquire a technology.

Game of trying to see what is the best deal you

could get. Sometimes the company #2 market

share is much forward excited about your tech

that the company that already hold the numer 1

market sharing position

There are not fixed rules, no two alliances are alike.

Not necessarily true that the bigger the

company the more resources they have the

better the licensee…

If you are an experienced deal maker, you are more

likely to strike a good deal.

Evaluate the best candidates. Ask the

companies: why whould I license this to you?

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Appendix II - Summary of interviews Commercialization Strategies of Research Providers and their Realization in the Negotiation Process

Page 5 of 8

Interviewee's Position

Case

Interviewee's point of view

COMMERCIALIZATION

STRATEGIES

Licensing

Partnerships and Alliances

Sell technology / company

Direct commercialization

Collaborative R&D

CONTROL RIGHTS

Manage clinical trials

Process development

Manufacturing

Danish Biomedical (diagnostic kits)

CompanyLarge Pharmaceutical Company Mexican Pharmaceutical Company

Research Study

(Lerner & Merger

1998)

Chief Executive Officer Commercial Director

Small diagnostics company vs. customers

contracting its servicesSmall biotech vs. Big Pharma Small biotech vs. Big Pharma

Small Company Big Pharma Small Company Financing Company retains

Big Pharma looks at companies at all stages: from

early stage to clinical trials, and technology

platforms. They are usually open minded.It varies with the stages of the product.

Mostly all the deals are based on licensing.Tthe small firm licenses out in a regional

basis and usually based on royalties.

It is commonly performed in combination with

licensing deals.

Big Pharma evaluates projects and defines

investment based on milestones, upfront

payments or partnering combining assets.

Some cases acquisition works better. If the other

company has only one product, they might decide

they are open to acquisition that makes more

business sense.

Sale of company if the company has a

package of products attractive to the large

pharma.

This is the main focus of the company.

This is a secondary business.

It is done mostly by Big Pharma, though there

might be some cases where the small company

will want to participate in one way or another.

Usually Big Pharma retains this right, but it

is variable if the small has capabilties and the

therapeutic class is small.

57%

It depends on the size of the companies and

the therapeutic class.8%

More than keeping a right, it is because the small

company does not have the manufacturing

facilities.

If the small company has manufacturing

capabilities and the therapeutic class is small,

then the small firm tries to retain it.

63%

Appendix II - Summary of interviews Commercialization Strategies of Research Providers and their Realization in the Negotiation Process

Page 6 of 8

Market universally

Exclusivity

Terminate contract w/no cause

Sublicence

Shelve projects

Ownership of technology

Patent litigation

Delay publications

Ownership to improved

technology

Danish Biomedical (diagnostic kits)

CompanyLarge Pharmaceutical Company Mexican Pharmaceutical Company

Research Study

(Lerner & Merger

1998)

It varies from deal to deal, often the small

company might want to grow and develop the

marketing capacity, so they might ask for some

rights, and if it makes sense, Big Pharma agrees on

that.

The Big Pharma ask to commercialize in the

G7: U.S., Japan, Spain, England, France,

Italy, and Germany. But there are also

agreements to co-market and co-promote

products.

67%

Big Pharma asks exclusivity, it is really the

added value of the pharmaceutical product.80%

Both parties have the right.Big Pharma keeps this right, if pharma terminates,

usually the license goes back to small firm.

Large company can terminate a contract with

cause such as viability, competitive position,

market, etc. But it is commonly penalized if

it is terminated with no cause.

32%

This feature is attached to exclusivity rights. 26%

Small companies want a partner who can develop

it. Pharma should have an obligation to market, or

if it does not work, license goes back to the small

company.

Normally the purchase of a license has the

intention to commercialize. 93%

It depends on who makes the discovery, usually

the company paying for the service.10%

Normally the owner of the patent litigates

against an infringer, but traditionally it

receives help from the partner with financial

resources.

25%

It varies from time to time, usually Big Pharmas

ask for this right, but it has to be well regulated.35%

It varies from deal to deal. No general idea

Appendix II - Summary of interviews Commercialization Strategies of Research Providers and their Realization in the Negotiation Process

Page 7 of 8

BARGAINING POWER

Possitive factors

Negative factor

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Danish Biomedical (diagnostic kits)

CompanyLarge Pharmaceutical Company Mexican Pharmaceutical Company

Research Study

(Lerner & Merger

1998)

- In-house knowledge

- Equipment and platformsExisting competition. Level of breakthrough of the technology Financial power

- Lack of specific resources (I.P.)

- Size of company

- Quantity of competitors

Small companies do not have the resources to

conitnue with the project.

Scarcity of financial resources in the

company

Risk: Payment suspention by the partner.

Mitigation: Contractually define upfront

payments, ask the partner to guarantee the

contract by the bank and define of

responsabilities in the contract.

Risk: If both sides are not prepared defining what

they want.

Mitigation: Pharma has a dedicated alliance

management with people mantaining in contact

and managing the project.To have very well

written contracts.

Risk: When the Big Pharma takes the patent

and creates a blockbuster, then the small

company could end up having a small share

of that blockbuster (profitability risk).

Asymmetric information

Mitigation: Variable royalties per milestones

in sales

Appendix II - Summary of interviews Commercialization Strategies of Research Providers and their Realization in the Negotiation Process

Page 8 of 8

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Danish Biomedical (diagnostic kits)

CompanyLarge Pharmaceutical Company Mexican Pharmaceutical Company

Research Study

(Lerner & Merger

1998)

The best is always to have a protection. By

chance someone could be able to break a code of

your products.

The small companies are focusing on niche

therapeutic areas such as oncology and HIV.

What is used is that the company buying the

license is the owner of the brand, which at

the end is the highest value of the product.

What a company needs to enter with a drug

in a market is a professional muscle and all

the relationships with the doctors. Though if

the product has a differentiation or added

value, the adoption is fast.

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Appendix III

Interview Transcripts

(Audio files in CD-ROM)

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Appendix III Interview Transcripts Page 1 of 44

Interviewer: Ulises Elias Interviewee: Chief Executive Officer

Original language: English Company: Danish Diagnostic Kit Company

Location: Interviewee’s office Date: March 4, 2011

Tags Interview

Description of

company

Interviewer: Would you explain in a brief way what the company does, what

you are doing, products, production?

Interviewee: We do only customized defined products, that is our main business,

meaning that we produce some 76 thousand products every year, and they are all

individual, they are defined by the customer. And then, and other part of the business,

and these are ‘oligos’, used in R&D, in the academic sector and the

biopharmaceutical sector. The second part, the other leg we are standing on is

actually where we take some of the products that we do for customers, we also do

them some internal use and we turn that into diagnostic kits, so called IVD,

diagnostic kits. And these kits are sold worldwide, we do our own distribution direct

to end user in Denmark and Scandinavian, where as in Europe and the rest of the

world we have distributors.

It’s basically the products that you are producing, but you also, are you also doing

R&D in-house. We do have an R&D department, yes, which take care of, of course

developing our own test kits and then also questions and complains from customers,

they do that.

Interviewer: So basically the commercialization is through distribution, you

have the end product and you distribute the products through the channels all

around the world.

Interviewee: Yes. Except from the part if a Danish company or a Scandinavian

company comes to us and they say –“we have this issue we would like to set up, we

would like to use the new DNA technology fro this application”-, then we do a

system in setting up and refining for doing some development for them. So, that’s on

a project basis.

Interviewer: So, that is customized R&D?

Interviewee: Yeah.

Interviewer: But that is not the main part of the business?

Interviewee: No, but still significant part of our products

Interviewer: So, we can say that the company has several partners, some of

them focused only on distribution and the others are focused on R&D services

that they outsourced?

Interviewee: Yes.

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Appendix III Interview Transcripts Page 2 of 44

Many

companies in

R&D

Protection of

IPR’s

Interviewer: About the competitor, do you have a lot of competitors in Europe?

Interviewee: Yes. We do have I think if we added all up in Europe, that around 150

similar and smaller competitors.

Interviewer: The same as your company?

Interviewee: No, they’re very a lot quite smaller. We’re a middle size company. We

do have very big ones that are independent company or part of even larger company

like Roche, the Swiss company, and then there are other companies like us that are

completely independent.

Interviewer: Now the focus would be partnership of R&D services that your

company, or in your experience you can answer these questions in a general

way. Which control rights companies like this one try to retain when negotiating

with companies that are bigger like the pharmaceutical companies?

Interviewee: Yeah, we always sign an… is it about property rights, right?

Interviewer: Yes.

Interviewee: During initial talks and discussions, the first thing we do is simply to

sign or make parties sign an NDA –non disclosure agreement-, we do have standard

one, or some companies, particularly if it’s not American company, they normally

have their own, and they’ll only be open to us when they have signed that. And of

course we have a company lawyer, this is external, and then we go through and then

see if we are completely covered by the NDA. And then we start the talks, and then

since the development within this field is, or the progression is going to fast, initially

when we were developing this kits for leukemia testing, we had some talk and we

had some talks, we were doing some research in how to file for a patent production.

But this is so time consuming, this is so difficult, this is causing so much work that

the time taken for that, when you should be granted a patent, the product will be

already obsolete. So the progression in development is going so fast that obtaining a

patent is worthless. So what we do, the reason why we get away with having

exclusivity in the market place is that we move fast, we move with the market, so to

say. So, when new development comes in, we implement that. So when a Chinese

competitor will like to copy us, they already, they only have the last version, not the

present version. And then the configuration we do, we do it very complex that to do

reverse engineering is very tough, not to say impossible. If you know the individual

ingredients you are putting into the tube, of course then you can easily copy it. But

once, they are mixture there, and you try to, by reverse engineering to take them apart

again to see what are these guys doing, then that’s not possible.

Interviewer: So we can say that the product is protected by itself because of…

Interviewee: Yes, the speed and complexity.

Interviewer: But the company has patents?

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Appendix III Interview Transcripts Page 3 of 44

Right to

ownership

Right to

improvement

of technology

Interviewee: Our company? No.

Interviewer: It’s used based on secrets?

Interviewee: Yes, of course we are keeping all the recipes or whatever, we have all

the protocols, and they have kept very tight that no one gets a look into this. This also

why we have some challenges regarding the North American market for example, if

we are to sell the product in the North American market, FDA will have to approve it

and the FDA, they are quite demanding for the type of documentation for the kind of

documentation you have to deliver. And it came to the fact that they would like to

have our protocols, then we say –“ok, this can not be got”-, because once they’re out,

they even if it’s in the protected public services function, there’s a risk that someone

will make a copy, or an authorized person will get access, that is our answer, then we

say –“we don’t want risk that”.

Interviewer: Ok, in case of research and development services, when a company

approaches this company, and they start using your capabilities, and they make

a discovery, the ownership will belong to your company or the other company?

Interviewee: The other company.

Interviewer: So, you would be just like renting the facilities, renting the

equipment, space?

Interviewee: Yeah.

Interviewer: What if in the case that you also participated in the development

and then your employee also participated in the discovery, do you also own a

part of that discovery?

Interviewee: This we do it in the contract. It’s simple set up who has the right to

what. And it’s normally when you work in a company, even if my, would it be my

R&D manager who really got a good idea, and this idea would turn into a patent or

kind of property right, then the property right will never belong to him, always, it will

belong either to this company or to the company that was given you the assignment.

So, it’s never personal. I know it’s different when you work in the university and so

on, but working in private companies it is always belong not to you in person, but to

the company.

Interviewer: You are not interested in commercializing the new discovery? The

company as I can see is more as a platform technology.

Interviewee: Of course, if we do have a possibility in commercializing products for

customers that come here. We can help them in commercializing their products by

that is more in a business-to-business case.

Interviewer: Ok. In terms of patent litigation, who is in charging for filing for a

patent?

Interviewee: If it’s something that is put on us, as a service provider, then it would be

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Appendix III Interview Transcripts Page 4 of 44

Bargaining

power

Risk and

mitigation

Upfront

payment

for the other company to file for it. We do deliver the results, but if they want we can

help them, but then again in would be in a project basis.

Interviewer: Now, in a general way, the biotech R&D companies, when they are

negotiation contracts with big pharmas, let’s say, what are the things that help

increase the bargaining power to the small biotech company? What are the

factors that are giving the power to the biotech?

Interviewee: The in-house knowledge, the capital foundation. Equipment and

platform.

Interviewer: Why does a company approach your company instead of

approaching other competitors?

Interviewee: Because we have a track record. And we are actively approaching

smaller or similar companies that we know would be good matches to work together.

Networking.

Interviewer: And about the negative points?

Interviewee: Again, that’s size of company, lack of specific resources in terms of

intellectual property rights.

Interviewer: Could it be a weakness not to have a patent on your products?

Interviewee: It is better to have protection, because by chance someone could be able

to break the code. If you don’t have a patent you are facing severe competition. But

again, the size of this company, the speed we are able to deliver, to keep the process

ahead of the competition. So far, it’s proven to be effective. We are also in a niche

market.

Interviewer: So the size of companies that come to your company are big ones?

Interviewee: No, the same sizes like us. The big ones do this internally.

Interviewer: Who finance the R&D?

Interviewee: That can vary, normally it is the partner that will deliver, because the

contract will cover the cost, so to say. So we make up a contract to say –“we will do

this on the basis of your cost’-, then we calculate the cost to make an arrangement for

this.

Interviewer: Then you specify milestones in your contract?

Interviewee: Yes, you have upfront payment and then as you deliver you will be paid,

which is quite normal for project oriented.

Interviewer: Is it common to have upfront payment at the beginning in order to

start a project?

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Appendix III Interview Transcripts Page 5 of 44

Interviewee: It depends on the size, if we have to hire extra people, if we have to

allocate for a longer period of time production space, that space maybe we will need

to lease, then we will have upfront.

Interviewer: If the partner is not putting initially, how do you protect from any

opportunistic behavior of the other company?

Interviewee: Well, if you have a contract, the conditions are set in the contract. If

they are not paying then it is a simple legal matter.

Interviewer: In case that the company (partner) decides to stop the project, who

has the right to do that?

Interviewee: It is always said in the contract. Premature termination or whatever it is

called. That is also why you have these periods of payments. We sometimes if it’s a

small start-up company that we would like to help, and if they have a very risky idea,

we might ask to have the contract guaranteed by bank. But this is rare. I remember

one of two cases.

Interviewer: Well, we have covered all the topics. Thank you very much.

Interviewee: I wish you all the best.

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Appendix III Interview Transcripts Page 6 of 44

Interviewer: Ulises Elias Interviewee: Technology Manager

Original language: English Company: University Technology Transfer Office

Location: Interviewee’s Office Date: March 16, 2011

Tags Notes of the Interview

• Each deal is customized based on each case.

• The study committee integrated by the ministry of science designed a

standard or model agreement, but it is not a binding agreement; it can be

modified to suit specific agreements.

• It is specific to each university.

• The university retains the ownership.

• The university licenses out the IP to the companies.

• The university retains the freedom to use what it develops; it retains the

academic freedom.

• Bay dole act as background legislation.

• The university license certain area of application of the patent, specially when

it is about a platform technology.

• CPH and AU do fundamental research, whereas Aalborg does improvements

to existing products.

• Exclusivity is ok, but limited to applications or field of use.

• University retains the rights on improvements of the technology the university

does, but if the company improves it, then the companies retains those rights.

• The company can sublicense the technology at any moment, though the

University usually wants to control part of that.

• The university includes a clause of insurance on product liability. If the

licensee sells the product to the market, then the products affects wrongly the

market, then the market could sue the company, but the company can not sue

the university. It is the responsibility of the company/licensee. This is always

a discussion.

• The licensee has the rights to manufacture or commercialize.

• The university does not take part of the ownership of the companies, but it

can be an observer in the board (only opinion, no vote).

• To be part of a board would imply to be on the side of the stakeholders while

being also on the side of the technology and research. So, it would be conflict

of interest.

• In case of spin out, the difference resides on the financial deal, the university

would not ask for immediate royalty payments upon use or upfront payments,

but on sales.

• For an established company, the university asks for upfront payments and

royalties.

• Royalties according to the type of technology:

o Patent used for manufacturing (royalties based on uses in

manufacturing).

o Patent used as end product (royalties based on sales).

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Appendix III Interview Transcripts Page 7 of 44

• Milestone payments on sales.

• Factors influencing bargaining power:

o Number of potential licensees (the more, the stronger the position of

the university).

o Level of data.

o Reputation of the academics (assures good technology, strong position

of the university if good researchers).

o Usually the university and company apply for co-financing once the

tech has been licensed (university. not hurry to apply for money).

o The university is not dependent on license payments (hence strong

position).

o University is obliged to commercialize (weak bargaining power).

o University is under pressure by time, since it is paying the patent

(weak position).

• Clinical trials performed by the company, it has the rights, but it needs the

license.

• University does not perform clinical trials.

• Most companies are SME’s sublicense the technology after proof of concept

(point of inflexion).

• University researchers’ objective is to improve or find a new way to do

things.

• Improvements belong to who makes them.

• Termination rights.

• The company can terminate the agreement without cause, with three months

notice.

• If the company is in breach, then the university can terminate.

• On both cases, the university gets the rights back.

• The company does not have the right to shelve the patent; it must

commercialize it.

• About the disclosure of information, the University discloses certain public

information, some videos, but not the inventive step.

• Inventive step disclosed upon signing confidential agreement.

• If there are blocking patent, then the University does not commercialize the

technology.

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Appendix III Interview Transcripts Page 8 of 44

Interviewer: Ulises Elias Interviewee: Business Developer

Original language: Spanish Company: Mexican Contract Research and

Development Organization

Location: Via Phone Call Date: March 17, 2011

Tags Interview

Company

description

Clinical trials

Right to

manufacture

Business model

Interviewer: In general, if you could describe what the company does, what are

the main activities, how do you sell the company?

Interviewee: Well, we sell the company, mainly with a focus of outsourcing services

in medical devices. In our portfolio of services we have an initial phase, which could

be a market research, help in the patent filing, technical consultancy, and the initial

phase of risks, and technical and commercial viability studies. These are the first

phases as the consultancy services that we have. We also help to write the business

plan and sometimes to get financing. We contact them with the Science Foundation

and private capital if it’s feasible. We offer these services to complement our main

focus of medical device design. The next phase, which is the product development,

we include all the engineering part. We have the biomedical engineering area, design

and software. We have several designers and engineers to develop electronic parts,

ergonomics, industrial design, prototype, verification, and software design. From

testing to prototypes. Finally, the last part is the clinical trial services, diagnostics.

Interviewer: Do you conduct the management of clinical trials?

Interviewee: Yes, we do. We can start from protocol phase to all the management to

have the control. We have contacts with institutes, so we can conduct any clinical

trial the customer needs. Finally, we offer the pre-commercialization services,

regulation, spin-off, technical documents, manufacturing manual, distribution

information. This is very brief; this is the part of manuals. We have some links with

manufacturing companies who could manufacture their devices, but this is not our

business. This phase gets up to here.

Interviewer: So, you don’t manufacture?

Interviewee: No, we don’t manufacture. I was telling you, we have two business

models: outsourcing and incubation. Outsourcing, the customer is the owner 100%,

any change or improvement belongs to the customer. We create a plan with

deliverables, with different time and phases and collaborators. Finally, we hand in the

promised material, which could be a report, prototype, recommendations, according

to the customer’s need, and all the devolution of information. This is the end of our

labor, except if they continue with the next phase with us, that is another point.

The other model is incubation. This is when the customer has a very good product,

but they don’t have the resources. If they decide to be incubated, they need to pass

through due diligence, then we negotiate defining for example if they already have

patent, or a prototype, or tests, all that is taken into account.

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Appendix III Interview Transcripts Page 9 of 44

Right to ownership Right to market Right to terminate

Interviewer: So, this is a product already developed by someone else? you don’t

develop it…

Interviewee: Yes. We can also develop it, but for the incubation services, the products get here already developed, or something more clearly. When those projects arrive here, we define the value of the product, for example, if it cost MX$10 thousands, then our services will cost MX$5 thousand to finish the product. In that proportion, we define a contract. You have 2/3 and I will keep 1/3. In that proportion the profits will be divided. Mainly, our participation is by our services, not necessarily with funding. Interviewer: You don’t acquire the property of the patent?

Interviewee: Mostly, the customer has already the patent. Interviewer: What is the proportion of services that you currently have?

Interviewee: We have more outsourcing services than incubation. Interviewer: You don’t retain any type of control, for example, ownership, and

marketing, any of these rights?

Interviewee: No, these all controls belong to the customers. We only ask authorization to publish some type of information to mention their project very briefly with marketing purposes for our company. Interviewer: This type of business model, are there many in the U.S.?

Interviewee: Yes, there are. It is a very well known business model there. Interviewer: Then, you don’t keep the ownership of the patent, and you don’t

participate in patent litigation and other related things?

Interviewee: No. We can help in the development of the patent, registration, redaction, all the process, but we are selling only the services, the patent belongs to them. Interviewer: About the termination rights, who has those rights?

Interviewee: Bilateral. The clauses estipulate that any side, under some circumstances, can terminate it. Either by failure in the provision of the service, or by mutual agreement with a previous notification, normally 45 days before. Interviewer: None of them has the termination without cause?

Interviewee: No. Interviewer: Do you have some cases, if they are not confidential that you can

comment, which products you have developed that reached the market?

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Appendix III Interview Transcripts Page 10 of 44

Bargaining power

Interviewee: This product that created a spin off of a company. This is a device to

measure gastric movement and it helps to notify when the patient is in therapy and he

is going to enter in shock, it lets to notify that the patient is going to enter in shock 20

seconds before. That gives you action time in anticipation.

Interviewer: Was it incubation or outsourcing?

Interviewee: Incubation, but it started as outsourcing, once they realized they did not

have the resources to proceed, it turn into incubation. We created a start-up with that

product.

The other projects are not in the market yet. We are required to do only one part of

the development. Many times the companies that hire us for the development of some

of the phases, they are dedicated to one of the development phases. For example,

some are manufacturing companies, or clinical trials companies, or design and they

outsource the clinical trials, etc. then many times they ask us to participate in one

phase.

Interviewer: Are these Mexican companies, or are you competing in the

international market?

Interviewee: We are competing in the U.S. and Mexico. We have tried in Europe, but

it is difficult for the distance. The customers want to be in touch with the product,

they prefer to be close to the product…

Most of the companies like ours are very specialized, but none of them offer

integrated services, a global solution…this is seen in the U.S. as a disadvantage,

since in the U.S. the trend is the specialization. This means that if you are not

specialized, then they might think you are not good. But on the other hand that gives

us an advantage, even with them, because we offer all the phases and we can help

them from the initial part, from the beginning in the development where they need to

have a historic record of all the modifications in the design and thinking that what is

next is the clinical trial and validation before the FDA, for example, and they ask you

to have all the file and any change you do, or even if you only think about it, you

have to have it in your file. Many times the companies do not know all those kind of

things, then they move forward in isolated phases and when they get to clinical trial,

if they did not have the historic file, they need to do re-engineering to see what were

all the hypothesis they had defined and ruled out, so they prove it as valid. This is

one of the advantages we have, we know all the phases, and from the beginning we

are advising in all this.

Interviewer: What factors affect in a negotiation positively to your negotiation

power?

Interviewee: To have all the certifications, linked with institutions, aware of and an

expert in regulations, rules, etc. Relationships and connections with the scientific

community. They ask you about which universities you are connected with.

Interviewer: Does it influence positively the fact that there are only a few

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Appendix III Interview Transcripts Page 11 of 44

Full integrated

services

Distance

companies in Mexico like yours, so they don’t have other options but to go to

you?

Interviewee: Yes, in fact we don’t need to mention this. When we contact our

potential customer and we tell them what we do, they say –“wow, I had never heard

about a company like this in Mexico”- Actually there are not any. There are

specialized companies, but not offering integrated solutions.

Interviewer: And in a negative way, what do you think affects a company like

this?

Interviewee: One, when they see a company with a broad range of services, they

might think we don’t have the quality that a specialized company has. Sometimes this

could be a disadvantage. The other one is when we try to sell out of Mexico, there is

a conflict with the distance. They want to be checking up the product and put the

hands on.

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Appendix III Interview Transcripts Page 12 of 44

Interviewer: Ulises Elias Interviewee: Chief Executive Officer

Original language: English Company: Danish Biomedical Company

Location: Company address Date: March 18, 2011

Tags Interview

Description of the

organization

Collaboration

strategies

Primarily with

scientist

Interviewer: Could you please describe what your company does?

Interviewee: Well, we are a group of companies, and the parental company is

[company name], A/S, and in [company name], we sell microsensor equipment.

Microsensors are as small as 1 to 2 thousand of a millimeter and outside diameter, so

it is high-precision measuring equipment, and then whatever goes with the sensors

can be motorized. Manipulators can be…robotics. The largest subsidiary is

[company name], in this company we sell equipment to improve IVF, In Vitro

Fertilization. So, couples that can no have babies the normal way, they, generally,

they are treated with hormones, the lady is treated with hormones in order to make

several…eggs at the same time, then you will treat a series of eggs, fertilize them in

the lab and transfer the embryo in the lady. This is a treatment that is very poor in

terms of the results, only about 1/5 of the treatments are successful, in terms of

having a life out of it. For this reason we decided to develop equipment that could

improve the success rate that we expect by 40% by being able to quantify the

viability of individual embryos in such a way that you can choose the one which is

the most viable, and only transfer that one. So, these are the main activities in the

company. Then we have a venture also, it’ s called [company name] Respirometry,

which goes in to micro scale respirometry, which will also be used both in stem cells,

and also in IVF in the future potentially also for pre screening, but this is just patents

and projects, so there are not major activities on this.

Interviewer: Ok, those are projects that belong to [company name], you are

developing in-house everything?

Interviewee: Yes, but very often in collaboration with companies, primarily with

scientist around the world. So from the start, we had an idea, if we could a network

strategy in order to increase the exchange of information, increase the quality of

ideas, it would be a good idea. So from the start, back in 1998, we invited researchers

from all over the world, to have discussions, and generally researches wanted to use

our equipment in a special way. Now we are talking, ok, come visit, we pay food,

housing, we can go over me and sleep in my house, and we can discuss several ideas.

By combining our technology with their research interest from everywhere from

almost any research topics, from medical to environmental science, we got an

enormous amount of ideas. So we attracted more and more international researchers

to accrue our shareholders, so today we have 84 shareholders and those from U.S.

and Asia. So we are trying to bind them to us in order to exchange ideas, exchange

technology, exchange whatsoever. It’s been a strategy from the very start.

Interviewer: So, these stakeholders, they have stocks in the company?

Interviewee: Yeah

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Appendix III Interview Transcripts Page 13 of 44

Collaboration

with other

companies

Formal and

informal

collaborations

Right to

ownership

Co-ownership

Share IP

Right to

ownership

Interviewer: So, when it comes to collaboration with another company, what is

the type of collaboration that you have, is it based on a contract, an informal

way…?

Interviewee: Either way. In Fertilitech, we are certified a producer of medical

devices. When you are in this situation, you have to have very formal contracts, both

for development issues but also for production issues. So, you will have to document

whatsoever you do during your development. So, when you get an idea you have to

state in your quality insurance system “I got this idea” , and the way I continue is to

involve to these partners in this set up, so we had a brainstorm, we did this and this,

we chose this and this, and we have always the risk management issue to take care of.

We have to look into which kind of risk could be involved, and we have to talk in all

this. So, in this company everything is documented, very strictly, and if you have a

supplier, another company delivering ideas, development, products, sub-units to you,

everything has to be documented, whereas in the parental company, [company

name], generally we have more looser agreements with the partners, because we

don’t need them documented specifically in this company. So, we do it either way.

Interviewer: Ok, so it would be formal and informal. Basically, in the formal

way, when you sign a contract, when you develop the clauses, the ownership of

the patent belongs to [company name], or it belongs to the other company?

Interviewee: It depends which kind of topic it is, if it’s something we are interested to

sell, to produce and sell, the normal way is that we have the ownership. But it

happens that we have co-ownership with the other companies or other institutions. In

this case it could be a license agreement, we have a series of license agreements, or

you could just in one time purchase all rights to do the production. So, we also have

agreements where we basically have no idea ourselves, we just buy the idea from

another partner. This is the case, for example, Fertilitech, we already bought the

license of a patent to make specific calculations of an imaging tool.

Interviewer: What are the factors that you consider affect to the side of the

ownership of a patent when you are negotiating with another company?

Interviewee: So, our general approach is to share IPR in the relation that you are

bringing ideas to the patent, and general we never had problems in this, I think

particular because we have this standard way to do it that we invite people to come

here with their research problem, it could be either a strategy, it could be a way to do

it, or it could be the equipment needed to do the research. In this situation we helped

them, we find ideas together that will support their activities, that when they get back

home they have tools, they have plans for doing their own research. They get this for

free. But on top of that, very often, when you people with another background,

another interest, when they combine our technology with their research wish, a lot of

ideas evolve, with which ideas generally they are not interested in, so when we get

this kind of ideas, we tell them “ok, I hope you get everything you wanted for your

research, the idea isn’t the research tool for you, we got this idea, we consider this

idea mainly to be ours, would you agree on that?” Until now they have said “yes”.

Because they got what they said so much for themselves, that they don’t have

problems, that during the discussion we got our own ideas. But we are always very

open, because if you are not open you get problems. Always be proactive and have

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Appendix III Interview Transcripts Page 14 of 44

Exclusivity and

not exclusivity

Bargaining power

Idea generation

Right to

manufacture

the discussion. “We got this idea, we think it’s mainly ours, would you agree on that?

– Yes”. Ok, we make a little statement “we got this idea, and the ownership is

[company name]”.

Interviewer: Ok, but they have the license; you can offer the license to this

company.

Interviewee: Sure, sure.

Interviewer: Ok, it’s kind of exclusive or limited, both?

Interviewee: Both, you can negotiate everything.

Interviewer: What is the advantage of [company name] when you are

negotiating?

Interviewee: Our advantage is that we get a lot of ideas, and if you have a

relationship, if you have a cooperation where you are bringing a lot of ideas, people

generally feel well treated, they feel more wealthy as they came, so if you are

bringing in some ideas that you’d like to take for yourself is not a problem. But I

think it is a general approach that we’d rather give ideas, which means that if you

want something for yourself is not a problem generally.

Interviewer: Ok, based on that, I think probably you can not pursue all the

ideas.

Interviewee: No, every week we have more ideas than we can use. So new ideas

every week, so we’d rather give them away to see them used that sitting on them. If

those are very good ideas, then we get a patent.

Interviewer: Ok, in terms of the manufacturing, when you develop a new

technology that you consider that has a lot of potential, and [company name]

would like to pursue, you do all the manufacturing, you have the rights of

manufacturing that technology?

Interviewee: In general we have the rights, we don’t produce everything here,

basically we try to focus only on very specific microsensor units, the rest of our

production is done somewhere else, mainly in Denmark, but we also buy suppliers in

U.S., Asia, everywhere.

Interviewer: So we could say that the core products of [company name], you

already have all the core products, and all the research that you can do is like

you are willing to give it away?

Interviewee: Generally yes, because there are such a lot of ideas, so what we only

need is to take this…I mean patents are very good, but they’re also very expensive

and time-consuming to write, so we do all the patent writing ourselves, of course we

have advisors, both in Denmark and U.S. So, we have patent attorneys. But it takes a

lot of time and it costs you a lot of money, for example within the micro sensor

business, generally, we don’t have patents, because it’s craft, you have to be able to

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Appendix III Interview Transcripts Page 15 of 44

Open innovation

Bargaining power

do this with your fingers, and if not, it’s not problem. And also the market is general

small, it a niche market. For that reason there is no need for a patent, because even if

somebody took up one technology, if they could only sell for a few million kroner, I

mean, what is the idea of having a patent if it costs you two million kroner to make

the patent. But if you go into medtech or biotech, without a patent you are lost,

because nobody will take over the product later on, because everybody knows that

development and the first testing of biotech or medtech is very expensive. So

whenever you come to a solution that is well functioning, it is relatively cheap to

copy that. So without patent in medtech you are lost, you have no project basically.

In this situation also, the potential the turn over is much larger. So we work with this

fertility unit for IVF, we expect a turn over of 1 billion Danish crowns. Then it get

very good sense to get patents. So these are very different situations, it is extremely

important to consider what are you working with and try to focus your strategy to

whatsoever most relevant situation.

Interviewer: So, we could say that you have an intelligence area that is

evaluating all the ideas, and then decide, ok, this one is a potential one that we

would like to pursue by ourselves, and the other you can give them away.

Interviewee: Very often we give them away

Interviewer: So, I think this a special case, because well there are not many

companies like, so open as [company name] in terms of open innovation, that

you are inviting scientists and using the company as a research area.

Interviewee: I think there is a trade off between openness and size, the larger you are

the more you have to protect your ideas, we’re small, which means we gain a lot

from being open in interaction with a lot of researchers all over the world. And on

this situation you should not be afraid of giving away ideas, you should not be afraid

of releasing secrets, whereas if you are a large company, you have to take more care

because you have a lot to lose. So, we generally make ideas from scratch, so we have

a lot to win at being open.

Interviewer: Ok, how do you protect your IP then? Just based on the patent?

Interviewee: Yeah. Also design patent, we do that , but generally is patents, globally

protected patents.

Interviewer: Ok, perfect. What are the negative factors that affect the company

when you are negotiating, in terms of bargaining power? When do you feel

weak?

Interviewee: In general we don’t feel weak, because we have the ideas, we have the

patent, so this is a strong position to have.

Interviewer: So, that is interesting, this is not a normal case I would say, because

most of the companies, and yesterday I interviewed a Mexican company, they

said that they feel weak when they say that Mexico has not a very good

reputation in terms of development of new products. I don’t think this is the

case of Denmark as a developed country.

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Appendix III Interview Transcripts Page 16 of 44

Reputation

Right to delay

publication

Right to patent

litigation

Interviewee: We don’t encounter problems like this. Generally I think Denmark is

considered being an innovative in terms of science, but you have a lot of innovation

going on in Mexico, I wouldn’t disrespect what’s going on there, I have a lot of

respect on what’s going on.

Interviewer: So, you consider a reputation is a factor to measure in the

bargaining power?

Interviewee: It could be.

Interviewer: You have most of the scientists that are from here, or also from

outside like you mentioned?

Interviewee: We have scientists from everywhere, but most of them are from

Denmark. We have people from Canada, from Sweden, in collaboration we have

scientist from everywhere.

Interviewer: Ok, and do the scientists here publicize the results of a research?

Are they allowed to publicize?

Interviewee: Yeah, sure. If you try to limit researcher from making publications, you

are dead. You don’t play anymore.

Interviewer: When it comes to collaboration with other companies if you are

working in a research contract, are they also allowed to publicize?

Interviewee: No, if you pay somebody to make a consultancy, the development based

on consultancy, then we always say “ok, the ownerships is ours so you can not

publish this”. But most of our interactions are with scientists.

Interviewer: Do you think that is an incentive for a scientist to work on a project

where he can publish?

Interviewee: If you really want to play, to move faster with new ideas you have to let

scientists be scientists, otherwise they don’t have fun. Very good ideas demand fun,

that is where the energy comes from.

Interviewer: Ok, the other question would be –in the patent litigation, when you

have a patent but you license out the patent to a company, and then there is a

third party infringing in the patent, who litigates the patent? Is it [company

name] or the licensor?

Interviewee: It can be either way. We don’t have much problem with that. But I think

in the future we’ll get some problems. A new company out of Stanford that is

actually trying to patent very close to our patent, so I think in the long run there will

be some discussions with this, but it is probably two three years from now, so I don’t

spend too much time worrying on that. Generally we have no problems. We had one

situation with [company], but after a while they decided to go in another direction.

So there have not been major problems. Basically we did not meet enough problems.

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Appendix III Interview Transcripts Page 17 of 44

Small number of

companies

Connection with

the scientific

community

(customers)

To be frank, mainly, the main reason for having patents is also to frighten people

from entering your interests. So, of course, sometimes you have the patent fight but I

think compared to the amount of patents, it is not very often.

Interviewer: Have you ever terminated a contract based on an infringement of

clauses?

Interviewee: No. It’s bad PR if you fight for many years and you lose, then rather

give the money to prevent the situation from the bad PR. We never win in this

situation. It is better not to try to spend your energy on fighting. Our wealth is created

on getting new ideas, not from fighting. Larger companies will do the fighting, they

have more to protect.

Interviewer: I think they base their strategy on trying to protect the patents.

They say “if you are infringing, they, “I will sue you” to get something out of it.

Interviewee: We’d rather find something else

Interviewer: Are there many companies in the market like [company name]?

Interviewee: No, we are a little bit special, so we had competitors for the micro

sensor part, we had a competitor in the U.S. and Germany, but they decided to stop. I

think we have a better strategy than they have, also better connections to the

researchers and these are the customers for the micro sensors. It is part of the strategy

that we have a better one, a better connection.

Interviewer: Also that is another point, I think, base on the bargaining power,

you have better connections with the scientists…

Interviewee: We are connected to the scientists and to the customer, so I think it is a

better position.

Interviewer: But also the small numbers, since there are not many companies in

the market, when they come to you to negotiate, and say “there are not many

options”, then I have to accept your terms sometimes.

Interviewee: Exactly.

Interviewer: We can say that you a developing your strategy on a platform, you

develop the sensors and they can be applied to…

Interviewee: Every platform, yeah, so we focus on the very centralize sensing unit, an

sometimes we go a little bit outside trying always to keep main focus on what’s very

difficult on this, this is the sensing unit, that is where we are best. We can’t compete

with the largest companies…

Interviewer: So, basically these were all the questions. Thank you very much for

your time.

Interviewee: You’re welcome

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Appendix III Interview Transcripts Page 18 of 44

Interviewer: Ulises Elias Interviewee: Technology specialist

Original language: English Company: Biotechnology Consulting company

Location: Via Phone Call Date: March 21, 2011

Tags Interview

In-house research

to external

research

High overhead

cost in companies

Rights

Pharma wants all

license rights

Well protected

patents

Well written

patents

Interviewer: Can you describe a bit more what the commercialization strategies

are for a biotech firm?

Interviewee: In terms of strategies, a lot of companies have stopped doing their own

research, because research within the companies is extremely expensive. Now, in

general, their overhead is 250 per cent of the cost of the research. So, if they’re

actually doing the research is a hundred thousand dollars, then the overhead will be

another 250 thousand dollar, so it will be 350 thousand dollars price tag…and that is

much much higher than virtually all the universities. So, all the universities have

indirect cost that range from 40 to 60 per cent in general. So, for having a hundred

thousand dollar of research, it might be another 60 thousand dollars of indirect cost

for heat, light, building maintenance, things like that, personnel, project

management… So, most companies now are looking to small companies, start up

companies that have new technologies or to the universities or research institutions to

acquire their new products. So, that, I think in general there is a time when

companies like Merck and Pfizer did all of their research in-house, but I think that is

becoming less and less common to the reasons I stated.

Interviewer: Ok, so we will say that the companies are doing their own research

but in some cases they are willing to also buy the research or the products from

other small companies.

Interviewee: Yeah, and as I said, the model of in-house research, I think it has been

declining over the past decade, because it is so expensive, and they can go out and

shop for the kinds of technologies they are interesting in universities and small

companies and acquire them through licensing. So, I think in general, the way they

are approaching…

Interviewer: Ok, in terms of the biotech firms, when they are negotiating with

the big pharmas, what do you consider that the big pharmas are trying to retain

when they are negotiating and they say -“ok, you biotech company, I want to

buy your technology, but you have to comply with these requirements to

continue negotiating with me?

Interviewee: Well, the rights they want to retain are the rights to license the

technology, that’s the point that matters, and of course they need a very well

protected with patents and other intellectual property protection. So the first thing

they are interested is that the technology is patented and that it is secured, that is

there is no other people working on the same area… So, the first is to make sure that

intellectual property rights are clean and that the patents are well written and they

provide as much protection as possible for the technology. Then, once they have

acquired the license, they will, most small companies and research institutions do not

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Appendix III Interview Transcripts Page 19 of 44

Right to patent

litigation

Right to

manufacture

Right to market

Exclusivity

Regionally

Field of use

Type of license

want to have to protect that technology in case of a patent infringement suit. So, they

will share the rights for protection of the technology with the company. The company

will have the first right to file a lawsuit to protect the intellectual property in case of

infringement, and the university or small company will take the secondary position.

So, if the company chooses not to pursue to a patent infringement lawsuit, then the

university or small company can set and assume the responsibility. In general, there

will be a shared responsibility between the university and the company. So, that is

very important because also infringement lawsuits can be very very expensive. And

companies, and small companies in particular just cannot afford to do it.

So, other than that, they will always take always take manufacturing rights, they

always keep marketing rights, because that is what they do, that is the whole idea. By

assuming the license for a company, for a project or a product, they are expecting

they’ll be doing the marketing, manufacturing, and sales. That’s clearly one of the

reasons they’re doing, ‘cause that’s where they make the money.

Interviewer: Ok

Interviewee: Huh, ownership rights will stay in general with the institution. The

license from the university, the university will retain the rights, the ownership rights

to the intellectual property. But the company will license all rights for a given field or

worldwide rights; the licensing rights can be very variable. So, in general they will

want exclusive rights to that product in Europe and the U.S., for example. Some of

the companies are multinational company, you know, then they will want worldwide

rights. If on the other hand, it is a national company just in the U.S., then only

exclusive rights in the U.S. but I will reserve rights for Europe and other sectors in

the market depending on the companies to perform perfectly in that market place. So,

if I’m licensing to a company that has strong U.S. presence, then I will give them

rights in the U.S., if you are licensing a company in Mexico, I will give them Mexico

and Latin America, for example. But, perhaps I won’t give them rights in the U.S.

The other thing you can do with the license is to say –“ok, you get exclusive

worldwide rights, but you must within one year of getting the product in the market

place, you must sell sublicenses to a U.S. company, to European company, to an

Asian company. So you can estipulate in the license, the performance of the licensee

in terms of marketing in other part of the world. So, there are also other ways to

arrange the license. Now the other thing that the license can do is to estipulate the use

of the product in a particular disease state, say vascular disease. But, it may be that

the product has applications in rheumatology or gastrointestinal disease or something

like that, so you may not license all the applications of the technology to the licensee.

You can give worldwide rights for example to the private vascular market, but they

do not have rights to sell the product in the gastrointestinal market, or in the

rheumatology market. So, there’re all sorts of ways to divide up a license, and that

really determines the kind of licensing conditions that a company will pay to achieve,

to acquire that license. Obviously if they receive worldwide license for all available

applications, then the cost to the company is much higher, than is that you are

licensing at worldwide for just a cardiovascular market, and not other clinical

conditions, or licensing to U.S. or North America only, or to Mexico and Latin

America only. So, all that changes the type of payback to the licensor, that could

exist. So it gets really complicated, and the real issue is when you go out to negotiate

a license, you have to understand a great deal of what are the market applications,

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Appendix III Interview Transcripts Page 20 of 44

No standard

contract

Ownership to

improvements of

technology

Multiple

ownership

Bargaining power

Value of

technology

Competitive

advantage

what is the market demand in Europe, in Asia, South America, and the pacific rim,

Australia, so you have to understand the potential market sizes in those areas, so you

know how to negotiate that license. If you end up giving up a license in the world, as

licensing rights. So, it’s quite complicated.

Interviewer: So, we can say that the analysis of a contract like this when it’s on a

case basis, we cannot generalized in terms of the industry or the

biopharmaceutical that there are standard contracts for this? It is based on a

case, right?

Interviewee: Yeah, I mean, there is no such thing as a standard contract for this type

of thing. Because of the kind of product, the applications, the different markets they

can go, a lot of things like that. So, each contract will vary depending on the type of

product, market they will reach into, the geographic area that the license includes,

and what the stipulations are.

Interviewer: In terms of the improvement of technology, once they license out

the technology, in general we could say that if they improve the technology, who

retains the ownership for those improvements? The owner of the license of the

one making the improvements? What is the common practice?

Interviewee: Usually it is for who makes the improvements, and frequently there is a

collaboration that takes place between the inventor and the corporate R&D people, so

it is not at all uncommon for new patents, improvements in the patent will be held by

multiple inventors from within the company and within the university, or within the

small company that has licensed the technology. But it really depends on who makes

the invention. And it is very important to define what is the invention, so that,

invention is not simply a way of, it has to be creative in nature, so it must add

creativity to the existing technology to be an invention. And so, it’s not just a matter

of figuring a faster way to test samples. Because that is not really an invention. It has

to be creative in nature to be an invention. And it has to meet the criteria again, for

example, existing in the U.S. It is not obvious, it is unique, and it has applications…

And it is very important that those criteria apply to any improvements to the

technology.

Interviewer: In terms of the bargaining power, what do you think affect

positively to a biotech company when negotiating with a big pharma, what are

the good points for these companies?

Interviewee: Well, the most important things is that the technology adds value to the

existing products, and I always, whenever I do an analysis of technology, I look at

the competitive advantage of the new technology compared to whatever might exists

in the market place today. And if the competitive advantage is a 5 per cent of… then

there’s not much benefit in investing millions of dollars in bringing in a new

technology forward. If however, the competitive advantage is 50 per cent or 100 per

cent, 5000 per cent, then obviously there is a very important benefit to the

pharmaceutical company to acquire this technology. Particularly, if the

pharmaceutical company is already in the market place where, say a cardiovascular

drug, and the new product that you will be there at licensing provides a significance

advantage in that. Then they will obtain a competitive advantage in the market place

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Appendix III Interview Transcripts Page 21 of 44

Company number

two on market

More resources

not necessarily

make a better

licensee

Licensee’s

assessment

Approach in both

ways

Partnering for

resources

against all of their competitors. If however, they are not in negotiating that kind of

deal, then you go to the competitors, and they’re very hungry to become competitive

with the original pharmaceutical company that you have talked to. So, it’s really a

game of trying to see the best, what’s the best deal you can get, and sometimes the

company that is number two in the market share is much more excited about the new

technology than the company that already holds number one market share position.

Do you understand my point?

Interviewer: Yeah. Definitely… there is literature talking about bargaining

power saying that the company putting the resources or that the company that

has more resources in a project has the bargaining power, what do you think

about this?

Interviewee: I think, companies that have a lot of resources are always nice to work

with, but in some cases, you know, the new technology might be one of 500

technologies they are working on, so, it is a low priority within the pharmaceutical

company, then if the company has 10 products and you are bringing in product

number 11, that is a significance advancement, that will give much higher priority by

the company and they can go out and raise some money to move the research

forward. I don think it is necessarily true that the bigger the company the more

resources they have the better the licensee for your technology. So I think it is really

narrow… One of the things that you must do is to qualify the companies to determine

which are the best candidates to work with. And one of the things that I always do is

ask the company –“why should I license this to you?” how can I be sure that you are

gonna make this move this forward quickly and time-fashion in getting into the

market to start making money? I want you to justify to me why I should license this

to you”. And I think this is a very important question they ask. It’s their job, once you

complete the license, they have a very big responsibility and part of this is stipulated

in the licensing agreement with milestones and time schedules and investment. And

the other part is the attitude of the company; it has to be right to make the right

company to license technology to.

Interviewer: Ok, so we could say that the big pharma are now looking for the

biotech small companies and they are just tracking their developments, it is not

that the biotech companies are approaching the big pharmas, is the other way

around?

Interviewee: Well, it’s both ways. A small company that has developed a product that

has achieved success in the animal studies, for example, we’ll look for big pharma

because a small biotech company really cannot afford full-scale clinical trial to get

FDA approval and to get into the market place. It takes a large company with vast

resources or a company that is willing to acquire those resources to make that

happen.

Right now we are looking at the cost of clinical trial for, say, GI drug, or a drug for

renal disease of infection, could be a billion dollars. So, for a small company to try

to reach that kind of money is not feasible. So they need to partner up with a big

company that can raise that kind of money.

Interviewer: So, what are the negative points that small biotech has to confront

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Appendix III Interview Transcripts Page 22 of 44

Right to delay publication

in a negotiation?

Interviewee: Well, I mean, the other negatives are, they have to have convincing data to support the fact that this product will go all the way to a clinical product, so if they have results that are not convincing, that becomes a very difficult part of the negotiations, and probably, they company on the pharmaceutical side will say –“well, we’ll in license this but the exchange of the first thing we are going to do is to validate those results in our laboratory under certain conditions that we know that we are on the right track, but if results do not work out well as they suppose to, then that will be a reason to cancel the contract, cancel the license, and go elsewhere. So, clearly the results of the data got to be good, the paten got to strong, very good protection. I think those would be the true things that matter, including one of the elements, which is having a competitive advantage through the product. (In terms of the right to delay publication) We have to, in general, within the university that is not acceptable. I mean, there can be minor delays, but usually what they say is, what the licensors say is, that they have the right to review any publications to see if there is any possible disclosure of proprietary information, but what usually happens is that the university or the biotech company will file a patent immediately on everything, so the publication is not an issue. So, the university has the responsibility to file patents on many new inventions that are related to the domain of the invention, and the pharmaceutical company will have the right to review any publication prior to submission. (Process development) Process development is really done primarily by the pharmaceutical company, and that is very standard, usually is not even discussed in a licensing arrangement, because it is understood they will be doing that. Interviewer: Thank you very much, and have a good day.

Interviewee: You too. (Exchanged information via e-mail) Interviewer: What are the main risks (in general) that you think a biotech

company runs when collaborating with a big pharma?

Interviewee: I think there are two primary risks: a) Biotech companies are cash poor and if big pharma infringes on the biotech patents, it will cost big money to defend those patents, money most biotech companies do not have, even though the biotech company might be legally correct, they may not have the $$ to defend their patents. And there are other situations that inadequate cash might be disadvantageous to the biotech company and put it at risk...but the greater risk is what I have cited above. b) The license must be well written and very thorough in addressing all the important issues. If it is not a strong license, big pharma may find loop-holes that allow it to violate certain things in the "spirit and intent" of the license.

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Appendix III Interview Transcripts Page 23 of 44

Interviewer: What does the biotech company do to leverage or diminish those

risks?

a) By having the IP owned by a big university or have big financial backing for the

biotech company, so there are "deep pockets" for defending the patent if necessary.

Diminish b.) by having the license well written by someone with experience and

knowledge in the field and reviewed by a second experienced person.

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Appendix III Interview Transcripts Page 24 of 44

Interviewer: Ulises Elias Interviewee: Investment Manager

Original language: English Company: Pre-seed Investment Organization

Location: Interviewee’s office Date: March 22, 2011

Tags Interview

Description of the

organization

Interviewer: Could you please describe what your organization does?

Interviewee: We are one of six innovation offices in Denmark. The innovation

offices were established from the Ministry of Science, back in 1997. And the idea

behind it was really to provoke innovation out of universities, research institutions,

institutions with general learning, but also people coming from the door, from the

street saying “I got an invention”. The idea behind is then that the Ministry of

Science provides some funding to start up small companies, small medium size

enterprises. The six innovation offices are private held companies, so we have, you

know, we have our own funding and we combine with the funding from the

Ministry of Science. But the Ministry of Science will not, you know, make

investments by themselves, so they have an agreement with innovation offices,

when innovation offices have new projects or take new projects on board, they will

come with the money, but the innovation offices will handle the investment from

the government. So, the investment will usually be, normally, in the company that

we start, the investment will be in the range up to 1.7 million Danish kroner in the

first round. That comprises 85 per cent investment from the government and 10 per

cent from us as a privately held company, and the rest from the founders or

inventors.

We usually establish companies as privately companies in Danish is called A/S,

which according to law you will have to come up with 80 thousand kroner, and that

is according to law, that is what is required to start a privately company. That

money will come partly from founder, partly from us. And it will be based on the

ownerships of the company. We normally take, in average, 25 per cent ownership

for the initial investment of 1.7 million kroner. So the founder will have 75 per

cent. And you can say -“is that a lot or is it very little?”. Depends. Generally

speaking I could say that we have other innovation offices like ourselves where

they take a higher ownership Our philosophy, specially when we talk

biotechnology, medtech, we know that they will have to go through several rounds

of financing, and each time a new round of financing that you come up, the new

money will take the share of your money, of the existent ownership. So if you have

a company, and you own your old 75 per cent of the company, and we had to look

for new money, and somebody came with, let’s say, 5 million kroner, they will say

–“well, we’ll have to invest 5 million kroner in your company, but we’ll take 33 per

cent of your company”-, which means that they will take 33 per cent of your 75 per

cent. So, that’s one third, they take 25 per cent from you, and they’ll take 33 per

cent from our 25 per cent ownership, which is 8 per cent … that is the first round of

investment. Two years later you need more money to develop your drug, or

whatever, you will need 25 million kroner, and you find investors that are willing

to invest in your company, and they will say –“ok, fine, but we’ll take 40 per cent

of your ownership”-, so now they will take 40 per cent from your now down to 50

per cent and so on and so on. So you can see, what will happen is that your

ownership will be diluted down. And that is a very common thing when we talk

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Appendix III Interview Transcripts Page 25 of 44

Pre seed funding

biotechnology, because it’s long term development, long term investments, and you

need a considerable amount of money to do your development work, and therefore

you will need several rounds of investment, and your dilution will probably end

with result when you’ll have maybe down 1.5 per cent of ownership. Now, we have

seen that, so, of course there are other ways where you can, kind of, compensate for

this, because you can issue warrants in the companies, so that the management of

the company will get warrants, normally or in many cases the management is the

same as the founders. Therefore we can issue, we know that they will be diluted but

in, to kind of, leverage that out, we will give them warrants, signed in the board

that they will receive warrants in the company, instead. So they can…some other

time if the make an exit on the company they can cash in all the warrants.

Interviewer: Is it common that this 1.5 per cent is more than the 75 per cent at

the beginning?

Interviewee: Well, I mean, in some cases they will start with an ownership of, let’s

say, 50 per cent. So, it all depends on, you know, how many rounds of investment

will they need before they can exit the company or get to the market. I mean, if

there is only one round, you still have a fair share of the company. But if you need

five rounds you will probably be diluted to a greater extend. And that’s the…, that

is one of the things that we have to structure with the companies. And therefore,

our philosophy is, to come back to that, that we’d rather give you a high initial

share of the company to motivate you, instead of saying –“ok, well, we’ll take 75

per cent and you take 25”- and then after two rounds you have 2 and a half per cent.

Do you get the point?

Interviewer: Yeah!

Interviewee: Yeah!. So, that is how we deal with companies, we have, we are five

investment branches in Aarhus, right now we are four, and we have an open

position, but we are five investment managers of which I am the … for the life

science area. Very briefly, my own background is a doctor from the university of

Copenhagen. I worked as that for seven years, then…to the pharmaceutical industry

for ten years. And then I worked within biotechnology, I worked as a consultant,

now I’ve been here for five years, working for the start ups, main coming out the

university, and the hospitals in the region. Because the six innovation offices are

regional, there are two around Copenhagen, one in Aalborg, in the northern part of

Jutland, one Aarhus, one in Koning, which is the western part, and one in…. So we

are spread out, but still we are located around the universities.

Interviewer: There are many compa…biotech companies here in Aarhus?

Interviewee: Well, the major part is in Denmark, is in Copenhagen. But there are

some, yeah! I have a portfolio of 12 companies, ranging from very simple, but very

successful, medical devices, to very complicated HIV, vaccine construct.

So we can provide the initial money, we are what we could call a pre-seed fund, we

know it is a high risk, we know more than probably more than 50per cent of the

company that we initiate will go down for diverse reasons. Either the scientific

concepts didn’t work, they will run out of money and that is subtly indications on

some companies from the past two or three years with the financial situation

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Appendix III Interview Transcripts Page 26 of 44

Venture funds

Stages of the

company

Corporate funds

Commercialization

strategies

Drug development

financial

requirements

Lack of resources

to take a product o

market

Few cases of

biotech firms

turned into full

fledge biotech

companies

Proof of concept

Clinical trials stage

globally. It is very hard to attract money. I mean, there are many reasons. We know

that we will lose some of the money because we are at the very early stage with a

very high risk, and you will hardly see any other investors going at this stage. The

seed stage, which is the next stage in the development, you will, we have two seed

funds…yeah, two seeds funds in Denmark that will go in at the…and you know,

they will join us at the next investment rounds, and one or two rounds later we

might have the venture funds coming in. Yeah!

Interviewer: After the two seed funds, you will have the venture funds, then…

Interviewee: And then you have the venture funds. And then you have,

increasingly, you have the corporate venture funds, which means that the big

pharmaceutical companies have established their own venture funds, so they go out

and look for, you know, companies themselves, small biotech and see if they can

buy technology out in the market. Yeah!

Interviewer: Perfect. In your experience, in the field of biotech firms, start-

ups, in general, what are the main commercialization strategies of these

companies? They start developing something, but then what? What happen

with their development?

Interviewee: The thing is that for many of these small companies, we know that,

specially we talk biotech, we know that the financial requirements to develop the

drug to day will be far beyond to what they can handle, I mean if the take a full

drug development today, you are talking about a total cost of, between 2.5 and 4

billion kroner. So, it’s a lot. And they will never, not only for that reason, but that is

certainly one of the major reasons, but for many reason they will not be able to take

a product to the market. I mean if you take a look at the biotech companies

globally, we have Genentech, we have Amgen, we have Genzyme, just to mention

a few, and they have, they started out as small biotech companies twenty, twenty-

five years ago. And they have now, pretty much, turned into full-fledge big pharma

companies. But they started out as biotech. But just think about the number of

biotech companies that have started since then, and how many of those have

become successful, very few. So, for many of these biotech companies the success

criteria will be –“can we develop this compound to a stage where we can make big

pharma or big biotech interested in our technology and they will come and buy the

technology from us?”- Hopefully at a stage where we have provided a proof of

concept of the technology or the drug, because that is also what we have the biggest

value increase for the company, because, the thing is that you, I can draw it over

here.

[Drawing goes here]

If you have time here, and you have value here, you can also say value/cost. If you

look at the development process of the new biotech compound, what you will see is

that you will, at the beginning you will have a low value increase, and then you

suddenly, maybe around here you reach proof of concept, and then drama…, the

value increases dramatically because now you show that it works.

Interviewer: That is before clinical trials…

Interviewee: That is before clinical trials, we can even do it this way. We can say, it

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Appendix III Interview Transcripts Page 27 of 44

FDA approval

Costly to develop

Product can be used

for more than one

indication

Exit strategy

Stock market

Proof of concept,

main target of

biotech companies

will increase, and here we have clinical trials, so we have, here we have shown,

maybe in an animal model that it works, between here and here we have made all

the regulatory things that need to be done in order to introduce the compound into

humans, then we do the first clinical trials, we show that it works in the patient

population that we aimed at, and then you will see a real increase in value. Now,

the clinical trials have started, but the clinical development is a long process and we

probably for down here, and we all have submitted to the FDA and get approval, so

what you will see that the value will increase but overtime it will kind of flat out

again. At the same time, what you will see here is that cost will certainly increase,

but when you come to the more heavy clinical trials cost will do like this. And

small biotech companies will not be able to take this part. Because it costs simply

too high, so they want best case, they want to get a successful clinical trial show

that they work in the patient, and then find someone who will buy, best case…but

they’ll buy the technology, and develop it into product that can be sold at the

pharmacy.

Interviewer: So, it’s mainly that the commercialization strategy of these

companies is just to sell the license, or sell the patent?

Interviewee: Yes. Major scenarios will be develop it, proof of concept or clinical

trial, sell the company as such, or sell a license, because it might be that your

product can be used to more that one indication, which means that you can kind of

slice your product, we’ll say –“sell one indication to one pharma company”- and

we’ll say –“sell another indication for the same product to another pharma

company”- and if that is the case, then you have a very good deal. But in many

cases, you will just sell the product, they will say –“we’ll buy it”- Few cases, they

will be able to develop the product to the very end and…be able to take it to the

market themselves. And hopefully at that stage, they will able to exist the company,

take it to the stock exchange, that is kind of a third scenario. We have for the past, I

mean, for the past, I mean, since the financial crises we have some barrier, even

globally, few stock introduction to the stock exchange market, but the, we have

one, was it last year in Denmark, which they tried to introduce it to the market, but

they were not successful, they had to…they could not give a fair raise for the stock.

So, in general they have been few emissions even in the U.S. So that’s, for most of

the companies, that’s not a, that is not a scenario, that they will aim at, they will

aim at proof concept and see if they can sell the technology, or first clinical trial

and see of they can sell the company, or a license.

Interviewer: In the case, in the case of a, when a company can be sold, but it

sells like entirely company, they get access to all the rights.

Interviewee: Yeah, I mean, sometimes they will simply buy or overtake, -“we’ll

buy the patent for this product or this compound”- thereby we have all the rights,

which is enclosed in the or contained in the patent application. In other cases they

will say –“we are only interested in the cancer indication, so all the other

indications that you have or whatever other vascular disease or whatever, we don’t

care, we just want the cancer indication, so tell us what we should pay you to get

the cancer indication”.

Interviewer: What influences on the decision of a big pharma in order to

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Appendix III Interview Transcripts Page 28 of 44

License vs. Buy the

company

Robust portfolio to

feed pipeline

First right of refusal

Main control rights

Right to

manufacture

decide –“ok, I want to buy the whole company, or I want to buy only a license,

or I want to…complete in an exclusive way?”

Interviewee: Yeah. I mean, several things, first, I mean, they, first of all, they look

at the specific compound that they are interested in, and see -“Does that fit into our

own existing portfolio of products?”- and –“how does it fit?”- But they also look at

the small company the pipeline of the small company. Will the company have

more products in development, which are more immature, but later on could

potentially also become new products? And if they see a company where they have,

not only this one product they are interested in, but they have also a portfolio of

other products that could be interested to them, they will buy the company, as a

whole. But if they say –“we are only interested in the compound you are

developing right now, with the proof of concept in cancer, you have tried it in

cancer patients, we trust or we believe that it works, we’ll buy that. The other

indications, we don’t care about them, you can sell them to anybody else”. So they

will just get a license to that particular indication.

Interviewer: So, it is in a case basis, it is not like the, it is a standard way of

doing this industry?

Interviewee: You see many different ways to do it. But…the thing is, that they of

course, the pharma, big pharma also wants to strike with deal. So they will look at

the company and say –“we know that if they move from proof of concept to clinical

trials, the value increase will mean that we’ll have to pay more, so we might take

the change and buy a right at the proof of concept stage”- so they will just go in and

say –“ok, we’ll give you one million dollar upfront, and you can now develop the

compound to the next stage, clinical trial stage, we can help you, we can also add

some funding”- but when we signed this deal, we will have what they call ‘first

right of refusal’ to pick the product if it works. They haven’t at this stage bought

the product, they have just bought an option to buy it.

Interviewer: In case it works, they will have the right to buy it…

Interviewee: Yeah, and if it doesn’t work, they can just withdraw and say –“ok,

we’ll just write off the investment”- yeah!

Interviewer: What is the, what is the, let’s say, you mentioned that it is on a

case basis, but what is the most standard rights that a firm is, a pharma firm,

is trying to get from a small biotech when they are trying to get the license?

Let’s say the rights to market, to manufacture…

Interviewee: They, they want to buy the rights to everything. They want to buy the

rights to the manufacturing process, which may also be patentable, they want to

have the rights to market the product, I mean, they want the rights of the product.

Period.

Interviewer: In an exclusive way?

Interviewee: Exclusive, yeah! In many, in most cases they want exclusive rights.

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Appendix III Interview Transcripts Page 29 of 44

Exclusivity

Bargaining power

Good work done

previously

Due diligence

Right to sublicense

Payment of

royalties for

sublicencing

Right to patent

litigation

Interviewer: What influences, say, in a negotiation when they are

bargaining...let’s suppose we are negotiating, what influences in a positive way

in terms of the biotech firm, what is the good points for it?

Interviewee: For the biotech, I mean, the value, it will increase if they have done

the work properly. You know, these small companies, they are not, I mean, there’re

a lot of laws, rules and regulations in the pharmaceutical industry. The authorities

require us, they have strict requirements to manufacture your product, how you

prove that you will, how did you come from A to B?, what were the processes?, are

they proven processes? Can you document your processes? Have you made them

according to the number of rules and regulations?, can we get a file where we can

see older documents? So, what the big pharma will do, in a process like this, they

will what they call ‘due diligence’, where they will go in, and go through all the

experimental data. They may even repeat of these experimental data to make sure

that the findings are correct. But they’ll check all the experimental data,

documented, make sure that is documented, make sure that the calculations that

have been made, you know, if there are some statistics existing that they have done

in the right way. They will make sure that the rights to the patents is within the

company, because in many cases you will see that, and specially here, I mean,

particularly in Denmark, for many other countries, even in the U.S., if a researcher

makes an invention, this invention is by definition owned by the university.

Therefore, if he wants, if he comes to the university and says –“I want to

commercialize my invention”- they will say –“you’re most welcome, we own it, we

will provide you with a license to the development”- They will not give him the

rights, they just give him a license. And if a big pharma comes to a small company

and say –“we want to buy this”-, they want to be sure that the rights are placed in

the small company, or at least that they can go back to the license sort, the

university, and say -“is it right, is it true that you have licensed the rights to this

compound to this small company, which we are now interested in buying.” So they

want to check a lot of things to make sure that they legally will also own the rights

to the product. And that is part of the due diligence.

Interviewer: In terms of, once they have the exclusivity, for example, for the

license, the big pharma, is it common they also ask for possibility to sublicense

technology?

Interviewee: Yeah! mmm, for the university, they will usually say –“ok, we’ll give

a license, but if you sublicense to somebody else, ‘big pharma’, we will have

income from your sublicense to us”- So you will always have to pay back to the

university.

Interviewer: And in terms of patent litigation, for example?

Interviewee: If patent litigation, just turns up, mmm, it will be between the owner

of the patent and the one that, you know, take them to court. However, in many

cases the university will say –“ok, we now license the patent to you, and you will

have to bear the cost in case of litigation”.

Interviewer: And is it possible, in case of a small biotech firm to litigate?

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Appendix III Interview Transcripts Page 30 of 44

Lack of resources

Right to manage

clinical trials

Interviewee: That is a big problem, because, and we have a change, that we know

that, we may have cases, you know, where we had suspected a big pharma

company to infringe a patent. First of all you have to make sure that you have an

issued patent, because if you don’t have an issued patent, you can’t go after them.

You have to have an issued patent, and then you’ll have to go back to them and say

–“ok, I can see that you have put this product on the market, however, we own the

patent rights”- and then the big pharma company will look at the small company

and say –“ok, be prepare that we will send the first fifteen lawyers next week to

discuss this with you, and we will take you to court in the U.S. to discuss this

further”- indicating that they are quite aware that the small company like small

biotech will never have the money to go to court. So they simply squeeze them out.

In many case that is what we see. Instead they will say –“ok, let’s sit down and

negotiate and see if we can find a reasonable solution to this”-

Interviewer: So we can say that is a negative point in the bargaining power if

they don’t have the resources in case of litigation?

Interviewee: I mean, you can say it is a negative thing, although they might have

the right to do it, I mean, it can be a negative thing to, that the big pharma just, you

know, kind of say, use the muscles, the financial muscles to squeeze these small

companies, but that’s, I mean, the stronger will survive.

Interviewer: So, the pharma usually uses in the power, the bargaining power,

the resources they have, they use the resources to put some power on the

table…you have been answering many questions in terms of the rights. For

example, the right to manage clinical trials, who usually, when they are in the

proof of concept and they decide to license out, and they negotiate with the big

pharma, who has the rights to manage the clinical trials?

Interviewee: Well, that will be, many times it will be part of the negotiations,

because in some cases the big pharma will say –“ok, we trust you as a small

company” we can see that you have the competences, even to run de clinical trials,

so we’ll let you run the clinical trials”- In other case they will say –“don’t care

about clinical trials, we’ll buy the license now, we’ll do the clinical trials”- And

many big pharma companies will do that, and they will even repeat some of the

clinical trials. Because they want to make sure that everything is done according to

rules and regulations.

Interviewer: So, they usually buy the technology and say –“ok, we’re going to

proceed with the development”- But do they ask also the small biotech

company to continue with the development or they just decide –“ok, give me

the proof of concept and then I’ll do the rest?”

Interviewee: Yeah. In many cases is that what they do. They just buy the rights

with the proof of concept and they just take it from there.

Interviewer: Ok, perfect. And every time there are more biotech companies

getting to this stage of proof of concept? Are there many like already here in

Europe?

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Appendix III Interview Transcripts Page 31 of 44

External funding

Alliances

Small company as a

feeder of products

Interviewee: There are a number of companies that have reached the proof of

concept, yeah, and you know, proof of concept doesn’t, from a financial

prospective, create a lot of money for them, it will increase the value, but the really

increase is when you take it to clinical trials. And for some pharma companies they

will say, because as a small company you will contact big pharma and say –“would

you have interest in our product?”- they will say –“it looks interesting, we can see

that you have a proof of concept, but come back when you have proof of principle

in clinical trials”- Then they will show true interest.

Interviewer: Ok, they have more interest on this area [pointing at the drawing

after inflexion point of proof of concepts].

Interviewee: Yeah, because at that stage you have decreased the risk of failure. If

you have shown that this product works in patients, it’s not the same as it would

really work in the huge clinical trials that you will have to make, but there is some

possibility or probability that it will work in general, also in large patient

populations, and therefore a probability that this product will be able to go to the

market.

Interviewer: And does this kind of financial support that you offer helps the

companies to get to the first part of the clinical trials?

Interviewee: Mmm, no, we, I mean, we are quite aware that we will not able to

support to more, at least not alone, to support them to proof of concepts and

beyond.

Interviewer: Alright! Is it common to have a kind of alliances in this industry,

like the big pharma will say –“ok, I am going to make an alliance with you?”

Interviewee: Yeah. We see sometimes that, you know, if a big pharma has gained

interest in a small biotech company, and not only interest in a specific compound,

as I have mentioned before, gained in the portfolio or product they have in

development. They may establish an alliance with that small company, and use that

small biotech company as a feeder of more products into their own pipeline.

Interviewer: Ok, so it’s like a subsidiary?

Interviewee: Yeah.

Interviewer: Research and development area

Interviewee: Yeah. They use it as an R&D function. But the thing is that they don’t

care on the fixed cost, because that is cared of the small company, themselves,

because they are still independent, the small company, they have an arrangement of

alliance with the big pharma but they work as an independent company.

Interviewer: And they are paid continuously or based on milestones?

Interviewee: Based on milestones, that is the normal thing to do.

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Appendix III Interview Transcripts Page 32 of 44

Payment based on

milestones

Right of ownership

Co-ownership

Right over patent

improvements

Negotiation skills

Deal maker

important

Interviewer: Ok, perfect. They usually in this kind of alliance, if they produce

a patent for example, who owns the patent in this case?

Interviewee: Well, that depends, because if an alliance, if in an alliance, the small

company has developed something new, they will usually be the owner of the

patent, but most likely be part of an alliance contract saying that –“ok, now we

share competences, knowledge, we share people that worked together, so, any

future inventions will co-owned by us”- But they will also say that, any, I mean,

you can call it prior art, prior patenting art, before the alliance was established will

be owned by the respective companies.

Interviewer: Ok, so it means that if the biotech company develops something,

with its own resources, it belongs to the company, even though it is inside of

the alliance?

Interviewee: No, if it’s done before the alliance started, but in many cases the

moment the alliance has been established, and they share knowledge, they share

people, they share cost, and whatever, they will also share the patents. The new

patents.

Interviewer: Ok, and what is the case when a biotech company license out to a

pharma and then both of them start improving the technology, the ownership,

how do they share the ownership?

Interviewee: That will normally be, also be part of the alliance agreement saying

that if they make improvements to an existing patent, it may be owned by the one

that makes the improvements, but they will have to share, part of that, the income

of that income with the other part. But, you know, there’s no kind of a fixed rule of

how that will be done. It’s usually based on negotiations.

Interviewer: Ok, so you think that if the small biotech firm has a very good

negotiator, they can get things that in any other cases they can not get…?

Interviewee: Yeah, indeed. It is very important that the business development

people in biotech are experienced, so that they can strike a good deal with the big

pharma, yeah.

Interviewer: So, we could have two similar cases but different people, they

could have different results in a contract?

Interviewee: Yeah. It’s a, I mean, the person part is important in this. Because there

are not rules, no two alliances are alike. It’s really a matter of you’ll sit down, one

part of this side of the table, the other part of this side, and then you negotiate. And

you put your arguments on the table, saying –“I think that this proof of concept is

very important for this project, and it’s very costly, and it’s very, you know,

variable, and therefore we want this price”- And then they’ll say –“no, no way, we

don’t’, but you only make proof of concept now, we’ll have to do the clinical part,

and that is very costly, so, we will not pay you, we will pay you 50 per cent of what

you ask for”.

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Appendix III Interview Transcripts Page 33 of 44

Interviewer: I ask this kind of questions because there is a lot of literature

measuring, for example, control rights, in this case, for example, this article

here, they made an analysis of 200 contracts, and they structured all the main

control rights and what common practices on this sector are that the biotech

firms are foregoing these rights or retaining these rights, but they don’t

mention for example the negotiation in the bargaining power that is, it has a

lot of effect con this.

Interviewee: It has, I mean, if you are an experienced deal maker, you are more

likely to strike a good deal.

Interviewer: Exactly. In terms of the termination rights, when a big pharma is

also negotiating, how do they decide the termination rights in a contract, is it

usually that they usually, big pharma, retain that right or share?

Interviewee: Usually, what, in case that big pharma has made a development

arrangement with the small biotech, they say –“ok, we have this first right of

refusal, we have this option to buy this product if it turns out to be a good product,

if that is not the case, for some reason it fails, we have no more interest in the

product, and you can take it back and you can sell it to somebody else”- That is

very common, that they say –“ok, we’ll have this option, we’ll developed it, and

we’ll see how it works, if it doesn’t work, I mean, it’s of no more interest to us, you

can have it back”- It is also important for the small biotech in a licensing

negotiation that state this and say –“ok, now we make this collaboration, and you

have an option to buy the product, but if you don’t buy it because it fails, or you

lose interest, or whatever, you have to give all the material back to us and we can

go to somebody else and try to sell it.”

Interviewer: Without mentioning names, can you describe very briefly one of

the cases that you working on, even product if you don’t want to mention, and

how they are negotiating?

Interviewee: Yeah, mmm, it’s very common now for these small biotech companies

to go to big meetings where venture funds, venture capitalist, big pharma are

present, and you arrange these bio meeting where you can schedule meeting with

venture funds, you can schedule meeting with big pharma companies, and there

you have half an hour to present your company, your idea to the big pharma or to

the venture fund an say –“this is the product that we want to develop, this is the

amount of money we need, are you interested?”- And then the big pharma will say

–“well, let’s take a closer look at it”-, or they’ll say –“no, this is not in our business

area or business focus, so we’ll pass on that one”- They venture fund will say –

“alright, it looks interesting, mmm, we will make a due diligence on your product

and if it turns out to be positive, we may want to invest in your company”- So, for

these small companies, biotech companies, it’s very important to be out there to

have these business development person constantly working with the

pharmaceutical industry, to challenge them, to contact them, and say –“we have

this very interesting product, which we think it could be interesting to your existing

portfolio”- And again, sometimes the big pharma will say -“well, it is certainly

interesting, but come back to us when you have clinical data”- And that’s how

many of our small biotech companies work, they go to this conferences, they

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Appendix III Interview Transcripts Page 34 of 44

Why alliance or

collaboration is

important?

Find competences

Avoid fixed costs

Bargaining power

recommendations

contact to venture, they contact the big pharma to present the company, to present

the data, and hope they will invest in your company. Increasingly, we have seen

that companies, that take other directions because the capital market is very very

tough, and I have been there since the financial crisis. So, a number of biotech

companies try to go to NGO’s, and see if they can give some of the NGO’s

interested in their product, there might be NGO’s that have interest in malaria, for

example, and that have, just take WHO, they have interested in many third world

diseases, like malaria for example, so they might have specific interest if you come

and say –“well, I have this very interesting and promising product, which we would

like to develop for third world malaria, -“could you have an interested in funding

it?”- And, it might be that they would, because they can see an … in funding

research that can … as a product for third world, because specially in the third

world the problems there, the particular problems, specific problem is that they

don’t have the money to pay many of the treatments that are not developed yet. In

Africa, they don’t have money to pay for internal treatment, it is simply to costly,

so there are some, even some of the big pharma companies have made initiative

where they provide products to third world areas at a better price.

Interviewer: Perfect, very good. Finally, we have covered all the control rights.

What would be some of the recommendations that you give to the small

biotech firms when they are negotiating with the big pharma?

Interviewee: I think, for the small companies it’s, I mean, they are, often they are,

you know, no more than 3 or 4 people in the company, so they can’t cover all the

competences needed to develop a product. Therefore if they can team up with the

big pharma that has all the competences available, they can share the competences,

they can pull out the competences, let’s say production capacity, which is huge

problem for many of these, because they can’t build a production facility. It is very

costly, they don’t have the experience, they don’t have the knowledge to do it, bu

the big pharma they have the knowledge, so if they can team up with them, and say

–“ok, can you help us build the facility, even already if you have a facility that we

can use for this particular production”- So, in that way, you avoid to constantly to

try to hire people because every time you hire a new staff, new people in your

company, it’s fixed cost, and fixed cost is the killer for many of these small

companies, because with the increasing amount of fixed costs, I mean, if you have

to pay salaries to twenty people each month, you have to have substantial funding

to do that, but if you can go out, collaborate with big pharma and then pay some of

the costs, or even some of these small companies even they use contract research

organization to perform the job. It may be that they don’t have any collaboration

with big pharma, but they are able to go out and identified contract research

organizations that have specific competences, let’s say in production, clinical trials,

whatever and just hire them in for a period of time for a specified job and then pay

them, but they are not hired in the company, and therefore they are not a fixed cost.

You get the point?

Interviewer: So that would be one of the recommendations, when the company

can contract the resources, they should do it to leverage the fixed cost. In

terms of leveraging the bargaining power in a negotiation, what would you

recommend in a biotech firm to be better to do it?

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Appendix III Interview Transcripts Page 35 of 44

Hire experienced

people with

negotiations skills

Risks and how to

reduce them

Interviewee: I think that is where one of the areas where you should see if you

could get senior people on board. People that are experience in negotiating, people

that have done licensing before, they are few. And there are a lot that can say –“I

can do it”- But there are very few that have really done it. So if you can identify

experienced licensing business development people, it is very important to the

success of the company. Because those are the ones that can go out and sell your

history, sell the good story about your company and the product that you want to

sell. You can hire them in a consultancy basis; you can also hire them into the

company. And they may sometimes be advantageous, because if you have more

products in the pipelines, they can even take the other products out and sell.

Interviewer: perfect. Well, I think in general we have covered all the topics on the

commercialization strategies, the control rights, and the bargaining power and

negotiations. I think we have done it very well.

Two questions exchanged by email

Interviewer:

1.- What are the main risks (in general anything that comes to your mind) that you

think a biotech company runs when collaborating with a big pharma (or any other

company)?

2.- In your opinion, what does the biotech company do to reduce those risks?

Interviewee:

Re. 1: Loss of control over the development process.

Re.:2: Make sure that it is an integrated part of the R&D process

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Appendix III Interview Transcripts Page 36 of 44

Interviewer: Ulises Elias Interviewee: Business Developer

Original language: English Company: Large Pharmaceutical

Location: Via Phone Call Date: April 8, 2011

Tags Interview

Type of companies

Approaching

companies

Control rights

Lack of resources

Commercialization

strategies

Interviewer: I would like to know a bit more from the point of view of the large

pharmaceuticals. When large pharmaceuticals are trying to get, to increase the

pipeline and when they are negotiating with R&D suppliers, so that is why I

decided to contact you. Just to confirm what is the type of projects that you

usually try to find in an R&D supplier, what is the type of company or at which

stage is the best deal for you of R&D company, when you are looking for...?

Interviewee: So, I’m here to say…we are actually looking at firms across the…so,

the early stage collaborations, also the clinical stage compounds from I to phase 3,

and we are also looking for technology platforms. We look at companies that…good

opportunities whatever they come from actually. I think we go with an open mind,

so I wouldn’t say that we are like looking for a project type of company.

Interviewer: Is it usually that you try to find a company or that these

companies try to approach a large pharmaceutical. What is the most common

practice on this?

Interviewee: I also here, we got many many many unsolicited proposals, but we also

reach out proactively to companies or groups that we think would be of interest and

we end up doing deals on both moves.

Interviewer: In general, in the negotiation process what are the control rights

that large pharmaceuticals are trying to retain, like for example ownership,

clinical trials, etcetera. What are the most common control rights that you are

trying to retain?

Interviewee: Yes, so, again it varies a bit, but also many deals are with the small

biotech companies that don’t have, that don’t have the resources to undertake

clinical trials. In those cases, we will take responsibility for clinical trials. Many

times…a small company could want some…rights. In that case we see if that makes

sense and see if that can be accomplished…they want to participate in one way or

another because they might be interested in developing and in growing the company

so they tend more like a big pharma company. If it makes sense we usually

accommodate.

Interviewer: And then, in those terms, also for example the ownership, you are

trying to license in the technology or you want to buy the technology, what is

the practice there?

Interviewee: That’s, majority is licensing. In some cases we see some work that is

also controlled by the other company, so if it happens that there is only one product

they might decide they are open for acquisition that makes more business sense in

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Appendix III Interview Transcripts Page 37 of 44

Licensing

Acquisition

Right to

manufacture

Based on

capabilities

Right to market

Co-marketing

Rights to

sublicense

Right to shelve

Right to terminate

that perspective. If that the way it is, then we will go and it’s an asset we are

interested in, and it’s only available through acquisition we will go… but in most the

time we work with the licensing.

Interviewer: Ok, what about the manufacturing rights, is it also that you try to

keep the control of manufacturing?

Interviewee: Yes, I would say it’s not so much keeping control, the typical licenses

we did or do with smaller companies, and pharmaceutical manufacturing is usually

nothing that they have, it’s capacity that they don’t have, so it’s no the question all

that we want to keep control, it’s usually, since, we are the one that have the

capability to manufacture and they don’t.

Interviewer: So, it is, what I understand now, it is more focused on the

capabilities of each party, like if you have the capabilities to manufacture then

you will do that, if the small firm doesn’t, then they won’t do it….

Interviewee: That’s right.

Interviewer: And in terms of the marketing, also, these small firms do not have

the capacity to market the product, that’s why, you market the product, is that

the way you do it?

Interviewee: Yeah, again it varies some deal to deal, often the company, as I told

you, they might want to grow and develop the marketing capacity, so they might ask

for some rights to do some markets and if it can make sense, we agree on that.

Interviewer: What about the rights to sublicense the technology, once you have

the license, the right, you can sublicense the technology to another party?

Interviewee: Those are really details in that agreements, I can not really give any

comments about that.

Interviewer: Ok. Ok, perfect. What about for example rights to shelve the

projects, not to continue with the project, to say –“I bought the license, and I

won’t continue with the project because is not feasible’-, you can do that, you

are not forced to market the product if it’s not feasible, right?... you are not

obliged not to continue marketing the product, so is it usually that you have the

right to not proceed with the project, once you have the license?

Interviewee: Obviously, the small pharmaceutical company they want to partner

with who can develop it, and not to just put it on the shelves. They will usually put

in some obligation that we have to develop it, that of course, if it doesn’t make

commerciable sense, or if it doesn’t work or if it is not safety………. We have to

reserve the right to terminate, then what will happen is just that license goes back to

the small company and they are free to do whatever they want or do it with someone

else. So, typically it is if the large pharmaceutical working on it, then they also

return the rights back. That is how we typically work.

Interviewer: Another question would be, what are the risks for a big pharma

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Appendix III Interview Transcripts Page 38 of 44

Risks

Alliance

management

Control well

written

Right over

technology

improvement

Based on

negotiation

Bargaining power

Right to delay

when you are dealing with alliances, what are those big risks that you consider

that are like running or facing a firm when creating alliances with other

parties.

Interviewee: I think, if there hasn’t been enough preparation…or both sides aren’t

really prepared to what they want into... from our perspective we don’t have those

issues…because we have dedicated alliance management, that our people that are

dedicated to just maintaining the alliance on this, in the contact people make sure…

if it’s not defined very well who does what, it could be complicated on the

collaboration. What is important is to have a very clear shared plan…and what kind

of deliverables that are…

Interviewer: So everything is specified in the contract, to avoid the risky

behavior from the other party?

Interviewee: Yeah, or to have the contract so well written that is to define very well

what are the engagements of each party…the other thing is that is clear…they may

have a strong…on how to develop it, and it is important to have a discussion on how

to develop it, once, after the license becomes, so it doesn’t come to, get to into a

dispute.

Interviewer: In terms of the improvement of the technology, who has the rights

of that improvement, I mean, if for example the large pharmaceutical continue

improving the technology that is licensed, and also the small firm continue

improving that technology, who owns the rights to those improvements,

usually?

Interviewee: that businesses are based negotiation. And it is really, it really depend

on how, what… from deal to deal, I can’t really give any general, general idea, it is a

very important point, but it’s something to negotiation from deal to deal. There is

not standard.

Interviewer: So it is based on the case, basically.

Interviewee: It’s based on case, yeah.

Interviewer: What do you think, what are the factor that influence in the

bargaining power in an negotiation, what are the good points for example, let’s

say, of a large pharmaceuticals, and what are the weak point of the small firms,

what is your opinion on that?

Interviewee: Well, … competition for the assets…the price, it’s not a benchmarking.

Interviewer: One last question would be, in terms of delaying the publication,

for example when you signed a deal, an alliance, but you are still working on

the development of the technology, who has the rights to make public the

information to delay the information that can be disclosed?

Interviewee: That’s yeah, IP right…that is something that has to be very well

regulated in agreements, and who has control rights might vary from time to time…I

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Appendix III Interview Transcripts Page 39 of 44

publication guess it’s big pharma, but it is typically something that is in the contract. How to

disclose… it is if you want to have the patent rights, it must be controlled how

information is disclosed.

Interviewer: Ok, I think it is a brief interview because you have a lot of

information on the website. I’ve been reading about many companies with the

big pharma, and most of them have like one of the strategies is to have partner

right now with the concept of open innovation that is being used by big

pharma…

Interviewee: It is important for us to…

Interviewer: I think we have covered most of the topics for the research.

Interviewee: Ok, then have a good weekend

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Appendix III Interview Transcripts Page 40 of 44

Interviewer: Ulises Elias Interviewee: Marketing director

Original language: Spanish Company: Mexican Pharmaceutical

Location: Via Phone Call Date: April 26, 2011

Tags Interview

Mexican Regulation Commercialization strategies Milestones Upfront payment

Interviewer: if you would like, we could start with a brief description of what

your company does, or even better the activities you do in this field?

Interviewee: Basically, the pharmaceutical sector is a very regulated sector in Mexico, and the main regulation is the information for the patient. So regularly, the communication is through the doctor. The companies visit the doctor and convince him about the product, so when the patient gets with the specific disease, the doctor prescribes the drug. If the patient follows the doctor’s indications, he heads to the pharmacy and buys the product the doctor prescribed with the commercial name. If the patient tries to find something cheaper, he asks for an alternative as a generic. The pharmaceutics can be divided in two big categories according to the type of approach with the consumer. First, the ones requiring a prescription of a doctor, in theory, and second the product OTC (over the counter) that can be acquired without prescription and can be publicized on TV, i.e. aspirin, athlete foot, gastritis, muscular pain, etc. Regarding the commercialization channels, they are also divided in big two groups: one is the private market and governmental market such as public hospitals for public employees…. Interviewer: We should focus more on the side of R&D supplier, backwards in

the value chain, considering companies that are developing something or that

have created a drug or a drug candidate, and when these companies start to

negotiate with a large company to see if they license out this technology…from

your point of view, what are the commercialization strategies these companies,

called research suppliers, use to be able to commercialize their developments?

Interviewee: Normally, as venture funds, what large companies do is that they do evaluations of the project, and they start paying based on milestones. For example, a product for baldness. You do your first forecast, market size, purchase intention, penetration, competition, etc. you get your first cash flow. If you get it approved in clinical phase II, the amount of money to continue is such. If the goal is not reached, then they cancel the project. This is in clinical phases; this is the most popular mechanism. If you did not reach the goal defined, then the research is over. But if you passed the phase III, there is an amount that is supplied to continue with the phase IV to be approved by FDA, the additional amount is provided. This is the most traditional scheme. One company provides the capital, and the other does what it needs to do. Now, when the product is in a more advanced moment, almost pre-approved, it has two forms: an upfront payment or less upfront payment plus share the risk and expenses. For example, if I pay you US$150 thousand as royalties, then I pay you US$5 upfront and then a percentage per each Latin country for the rest of the US$100 K…The other option is to be a partner of the company developing the

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Appendix III Interview Transcripts Page 41 of 44

Partnering Acquisitions Co-promotion Co-development Right to manage clinical trials Right to development Lack of resources

technology, where there is no upfront payment and the split of profit is 50-50 or 60-40 according to the subsequent payment. If the pharmaceutical company contribute sale force, marketing, commercial strategies, etc., then they share the risk and profits. These are the most popular schemes. Interviewer: The last option is like a partnership but with investment on

stocks?

Interviewee: Not necessarily, because normally, the negotiation is over the sales of the product. Though, some companies, for example, Pfizer bought, some time ago, Warner-Lambert, basically the goal was to buy one product called Lipitor. Then, it had two options: one to buy the product or to buy the whole company. So it was bought wholly. It did the same with Searle to buy Celebrex. Interviewer: Why is it better to acquire the company, instead of only the

product?

Interviewee: It depends of the bargaining position of the seller. If I have, the example of Warner-Lambert, I have the gross of my income comes from Lipitor, I create a basket of all my products and I sell the rest of the product. If the company is bigger, for example Novartis or Pfizer, then it is better co-promotion or co-development, so we divide costs and profits. Interviewer: When those alliances happen, considering the control rights, for

example, management of clinical trials, who proceeds with the clinical trials,

the small or big company? What is the common practice?

Interviewee: I have seen a lot of variation in terms of the agreement and capacities of each party. Returning to Novartis, if they have a capacity already developed or the therapeutic area you are looking for, or the acquisition of the brand and product of the other product, they let the company do the clinical trial. If the small company feels capable and developing it, they can do it. It is a mixture, according to the sizes and the competences in therapeutic areas. Interviewer: Regarding the process development, is it also based on the

capacities or bargaining power?

Interviewee: That depends on the size of the companies and the therapeutic class. An example, a product called inhibitor of proton bomb for heartburn of high level. This is normally a market with a high incidence of heartburn and gastritis. To make clinical trials phase II and IV, you need a large population, if you are small company, the investment you need is around US$1 billion, forget it, the best is to pass it to a larger company. If the therapeutic class is smaller such as oncology or HIV, more specialized, the number of patients is not so high, and you can prove therapeutic efficacy with a smaller number of patients. Another example is an English company called Millenium, which developed a product and sold it almost ready to market to Johnson and Johnson. It was for oncology, and it proved efficacy with a smaller number. Interviewer: Ok, so when it is a smaller number, obviously you require less

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Appendix III Interview Transcripts Page 42 of 44

Niche therapeutic

Right to

manufacture

Right to market

universally

Exclusivity

Regional licensing

Termination rights

Right to sublicense

Right to shelve

projects

resources and it’s easier a small company can do it, is that what you mean?

Interviewee: Exactly. Normally, the small companies are focusing in niche

therapeutic such as oncology and HIV, where the investment is less and the return

over investment could be more interesting.

Interviewer: Regarding the manufacturing, who retains the right to

manufacture, the small or the big one?

Interviewee: That is also a topic of economies of scale. Small therapeutic class,

usually the small company retains this. In high volumes of production, then the large

company.

Interviewer: Regarding the right to market universally, the large company will

ask usually to have all the rights to market universally, or how is the practice?

Interviewee: Normally the small companies are small but wise. They ask to

commercialize in the G7: U.S., Japan, Spain, England, France, Italy, and Germany.

They want to have the control and the response is simply is because those are the

biggest markets. For the rest, they license out to companies, giving exclusivity rights

in the different territories covered by the license. Normally it is tied in a package, for

region, all Latin America is given to one company, Pacific-Asia except Japan, and

the rest of Europe, Middle East, and North of Africa as another block.

Interviewer: So, the large company asks for exclusivity, they want to

commercialize it alone?

Interviewee: Yes, normally, exclusivity is asked that is really, that is really the added

value of the pharmaceutical product.

Interviewer: Regarding the termination rights of the alliance or collaboration,

without cause, who retains that right, the right to say –“we end up the

collaboration without reason”.

Interviewee: Normally the contracts are signed in a five-year basis, it includes

termination clause and a several clauses to penalize in case of unjustified exit. I have

seen in some cases they charge one year of production, fixed costs, if you want to go

out of the alliance you have to notify 60 days in anticipation, but I will charge you a

penalty of one year of product.

Interviewer: Regarding the right to sublicense, who retains that right?

Interviewee: It depends; it is tied to the exclusivity. I have seen co-marketing, two

companies promote the same brand, or co-promotion, where the large company uses

the original brand and the small company uses the same product with other

commercial brand. Both promote the same drug but with different brand.

Interviewer: About the right to shelve projects, is it common that the large

company shelve projects?

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Appendix III Interview Transcripts Page 43 of 44

Ownership of the brand Right to patent litigation Bargaining power Complementary assets Experience curve Breakthrough Fast adoption Asymmetric information

Interviewee: I have not seen these cases. Normally the purchase has an intention to commercialize. I have never seen that a company buys to shelve. I know that there are a number of products and patent that were discontinued for reasons of viability, market size, competitive position, but not for simply shelving projects. Returning to patent topics and market. Normally the patent can be negotiated being one company the owner or divide the royalties of the products. What is used is that the company buying the license is the owner of the brand, which at the end, the investment on the brand is the highest value of the product. Interviewer: Who retains the right to litigate patents?

Interviewee: Normally the owner of the patent. And traditionally it receives help from the partner, which is not the owner. Interviewer: In terms of negotiation, which factors affect positively the position

of the small company?

Interviewee: The level of breakthrough of the research, that is one. Second, how much money there is in their pockets. At the end, the small company appeals to the large one when the former has run out of money…the large company has resources such as: cash, labs, commercial muscle, therapeutic expertise, etc. Interviewer: Is it difficult to enter a market with a new drug?

Interviewee: You have an adoption curve not so pronounced, as you would like it. What you need is a professional muscle and all the relationships with the doctors. Though if the product has a differentiation or added value, the adoption is fast. Interviewer: Which risks are there in these kind of collaborations, risk

regarding the relationship.

Interviewee: Normally, when the big company develops it and it becomes a blockbuster, the small company receives 10 per cent of royalties, of what it could have been 50 per cent. I was thinking about an example, Johnson & Johnson made a co-development with a company called Jensen for an eritropoyetina. The product was very successful…the manager of the small company later declared that the worst decision is to have made an agreement with Johnson & Johnson, it was a bad deal regarding royalties, territories, who made the sales, customers division, etc. Interviewer: But was that not foreseen in anticipation?

Interviewee: No, they never thought the product was going to be so successful. It was a market they calculated in, let’s say, US$ 300 million, well, the product was sold in US$30, and that is enough. At the end, the market was US$3 billion.

Interviewer: And do you think the other company knew more or less about the

real size of the market? And there was an opportunistic behavior?

Interviewee: I think it was approached with asymmetric behavior, where the small

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Appendix III Interview Transcripts Page 44 of 44

Risk reduction Royalties as a risk reducer First of refusal

company sees an opportunity to get US$30 million, with that amount I can pay the payroll of 5 years, I can pay the bonus, and I am happy. And the other firm says –“to pay US$30 million for a market that values US$3 billion, where should I sign right away?” That is asymmetric information, where one company has a vision, whereas the other one has another one that in one moment the vision has sense for both, but 5 or 10 years later, when the market is enormous, the small company says –“oops”- And the big one says –“I have made the business of my life”. Interviewer: How can you reduce that risk?

Interviewee: Normally, what I have seen is royalties per milestones. Per example if we sell from 0 to 100 million, you give me 2%, from 200-500, you give me 3%, and from above 500, you give me 1.8%. So, what you really do is to protect yourself, and align the profit according to the development and sales of the product, which was you final idea. Let me add something else. All about cost of marketing, it is normally acquired by the company that acquires the product. And another way a small firm can protect if they negotiated in the wrong way the royalties, it is with the supplying option. The small company can say –“we are going to be the only supplier of the product”- Probably they won’t gain with the commercialization margin but it has a cash flow due to the exclusive production of the product. There is another thing called first of refusal that normally is included, if you want new product in the area you are commercializing, the first one I am going to ask if it wants the product is the current partner. If the partner does not show interest, then it can be sold to any other.

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