The BIO International Convention, May 18 - 21, 2009 in Atlanta, GA

May 18 – 21, 2009


The BIO International Convention

Re-Think Your Business Model for Success in the Current Economy

Never before has deciding to invest in joining a global event with 60 countries, 300 public officials, 20,000 life science thought leaders and dealmakers been so important. With 14,000 partnering meetings in four days and 2,200 companies within the BIO Exhibition, the BIO International Convention, May 18 – 21, 2009 in Atlanta, GA provides you efficiency and effectiveness - all together.

Disclaimer: No part of this article may be used, in whole or in part, without the author’s prior written permission. The opinions expressed by article author’s in the attached materials do not necessarily reflect the Biotechnology Industry Organization’s position on any of the issues contained herein.

Plans for your business were well on their way before the global economy screeched to a halt. Private equity or other financing you were counting on to fully build out your business infrastructure has now dried up. Now what do you do? Survive on ½ of your intended budget for the next 12-18 months? Retract from your plans completely? The answer is No! The key to surviving in this financial environment is to be flexible and see outside and beyond your existing business model. Most every business is feeling some impact in this economy. Manufacturers have excess capacity in the facilities that are not being used because demand and/or lines of credit are down. Research and development (“R&D”) projects have slowed down as financing and funding sources have dried up or have pulled back. Highly skilled engineers and other R&D professionals have excess capacity in time and resources, and employers are looking for ways to keep them busy to avoid having to let them go. Distribution and other channel sales organizations have seen both their supply and demand decrease from both the manufacturing and consumer sides. They, too, are looking for new ways to determine what they have to do to gain market share, including finding new products to interest selective buyers.

What does this mean for you? Despite the status of the equity financing, lines of credit, debt financing, banking or other financing you were relying on, you can still acquire the resources to continue development, proceed with manufacturing, and establish a field and channel sales and marketing organization. Instead of building it within your company walls, and incurring all of the infrastructure costs of personnel and facilities, consider leveraging the business models of others. Many organizations have excess capacity for full utilization of their personnel and facilities that you can leverage for your own business for less than what it would take for you to create or acquire it yourself. This type of outsourcing and alliance can be an excellent way for everyone to meet their objectives – as long as you are aware of potential downsides and cautions. First we will discuss the options and benefits; then the cautions and “how-to’s” will follow.

Third Party Business Leveraging Opportunities

Research & Development Outsourcing or Purchasing: If a company is finalizing the last stages of development or scaling up for full-production mode or trying to work out a kink, either additional engineering hands or a particular specialist may be needed. Many organizations with an R&D department will have an underutilized R&D team right now. This provides a perfect opportunity for you to contract some of the underutilized personnel. In some cases, you may purchase another company’s technology or method that can become an add-on to your technology – keeping you from having to re-create the wheel. You could do this on a royalty basis, preventing significant upfront costs. This could even take the form of allying with a would-be competitor. Despite all the advantages, these relationships can be filled with minefields. If you enter cautiously however, and you have known and stated objectives, you can avoid the pitfalls. The most important feature of any contract relationship in this area is going to be the ownership of the intellectual property developed. Nearly all companies,
including universities and educational institutions, are likely to try to gain and retain as much ownership of the intellectual property involved as they can. It is important to think long-term objectives in this relationship and not short-term gains. Short-term thinking can result in a loss of intellectual property rights in the long term, requiring you to either pay royalties on what you retained others to develop for you, or you not being able to acquire the rights at all. This could include someone else obtaining perpetual rights to your independently developed intellectual property. It is important to engage an experienced intellectual property rights attorney in the development of these types of contracts.

With the right contractual language in place, co-development agreements can be very successful and catapult a company’s research and development achievements dramatically forward. If a company can retain third party contractors on an entirely “work for hire” basis, where the company retains full ownership to all developments and improvements, this is ideal.

Toll Manufacturing/Facility or Line Leasing: If a company has developed a product, but now needs the resources and facilities to put it into production, building a manufacturing plant, buying or exclusively leasing one is expensive and possible out of reach in the current economy. Not only is physical space of the facilities required, but the specialty equipment and skilled personnel are necessary to run and operate the manufacturing pursuant to the R&D standard operating procedure (“SOP”). In today’s economic climate, getting the funds to build this out within your own corporate structure is nearly impossible. Fortunately, you can still get the product to market if you consider a different approach; identify a manufacturer that has the manufacturing capability to make your product. In most industries, there are numerous toll manufacturers that make products or components of products sold and branded by others. Most likely, you will find a company to manufacture for you that is not a direct competitor. However, using a competitor as a pure toll manufacturer is not as outlandish as it may sound. In many industries, such as medical device and software development, many companies have a relationship where one party creates a product or component of a product for a competitive company that private labels that product manufactured by its competitor. These are often termed “OEM”, or original equipment manufacturer relationships.
While channel conflict can be challenging since both parties are effectively selling the same product to the same or similar customers with different branding, these relationships work well for both parties. For the original manufacturer of the product or component, it provides an additional channel for their product to be sold and placed in the marketplace. For the private labeler, it provides an additional product to their portfolio without having to invest in the research, development, or manufacturing infrastructure costs. The business question here is would you rather have your product be the standard in the industry and have your product proliferate more pervasively in the marketplace (e.g., through others selling your product), or would you rather have your product be exclusively your brand only and prevent others from being able to offer the same or similar product and value proposition to the marketplace. Usually, the answer to this question will be one of revenue vs. branding objectives for your business. If you have a consumable product or service that goes along with your product, that would be an additional reason why you would choose to have others sell your product even if under a brand different from yours.
The alternative, if you do not want to have others manufacture your product (e.g., your intellectual property is highly confidential and you have chosen to put exclusive branding over revenue and pervasive presence in the marketplace), you can likely find a manufacturer that has the equipment and manufacturing capability to create your product and has excess manufacturing capacity. In this case, you can lease line space in the manufacturer’s facility and have your own personnel, or even the personnel of that manufacturer, manufacture your product. Protection of your intellectual property in this situation becomes more challenging and more important, but in many cases it is possible to partition off this leased space for your exclusive use.

In either scenario, protection of your intellectual property is very important and must be carefully thought out and documented in the agreement. We’ll discuss intellectual property issues in more detail in a later section.
Distribution and other Channel Alliances. You may have thought that only your employees who have been indoctrinated in your in-house environment and heavily trained can sell your product. Without the financial resources to hire this sales force, how do you market, sell and get your product into the hands of customers for the actual revenue generating activity? The answer is using others in the business of marketing and selling and who already have the networks and contacts with the customers you want. Channel marketers and sellers are looking for additional products to pique the interest of skittish buyers. You need experienced marketers and sales personnel with pre-existing contacts and networks to shorten the time it takes to start realizing revenue. These types of channel alliances can take a variety of forms.

Option one is to use a distributor. A distributor usually purchases the product from you and then resells it to the customer. If your product is new to the marketplace, the distributor may want to take your products on a consignment basis first until customer demand and interest is proven. Some distributors may re-package your product depending upon how you sell it, whether in bulk, as a raw material or otherwise. The value of this relationship for the manufacturer is that they can sell products without having to have a direct sales force employed by the manufacturer (although as discussed above with toll manufacturing and OEM relationships, the manufacturer may have both a direct and indirect sales channel for its products). The drawback for this relationship is twofold: (1) the manufacturer is not selling directly to the customer, so in most cases will not have that direct customer relationship; and (2) the price for your product is effectively a wholesale price and not the full retail price that the market will bear directly with the end user customer. The consideration here is whether you as the manufacturer would rather have more of your product hit the marketplace or would you rather maintain the relationship with the customer for greater profit margins, but less overall market penetration.

Another option to getting external sales and marketing channel support is to contract with individuals and companies who will function as independent sales representatives. These relationships are usually outsourced commissioned sales and marketing professionals and companies, which are similar in nature to having a sales and marketing division within your company. Some of these companies and individuals will want flat monthly compensation in addition to commission for sales, but some are commission only. All compensation in these cases will be heavily weighted on the commission, however. Therefore, instead of having the infrastructure cost of employees with salaries, travel expenses, benefits, etc., you incur a much smaller cost for the sales and marketing assistance. These relationships take varying forms of compensation, and are negotiable. They will allow the manufacturer to have a closer relationship with the end user customer, but may not provide as wide or deep of a customer base network as would be gained by a distributor.

The potential drawback in all of these retained sales & marketing channel support relationships is that you may not have either exclusive use of these resources and/or your product may not be their exclusive product within the same market. However, this can be negotiated, and there are many exclusive channel representative relationships in the marketplace.

Intellectual Property Concerns

In all of these relationships where you are utilizing others to assist you in bringing your product to market, intellectual property protection is imperative. Any time a third party not part of your employed personnel either uses, makes, or sells your intellectual property, the ownership and rights to your intellectual property are implicated and require protective and limiting language in a written contract. Most people view intellectual property rights as affirmative property rights. In fact, these rights should be viewed as more of a negative right to exclude others. In order to maintain those full rights in your intellectual property, you must affirmatively enforce your rights to exclude others through clear proscriptions limiting what another party can and cannot do with respect to your intellectual property. If you fail to enforce and proscribe these limitations on making, using and selling your intellectual property, you can be deemed to have waived your rights and can lose these rights in your own intellectual property.
In order to protect your intellectual property rights, you have to be sure to identify what intellectual property rights you have. Many think that intellectual property rights consist mostly of patents, trademarks and copyrights of finished products. This is a small fraction of what makes up intellectual property. You do not have to have a registered patent, trademark or copyright nor do you have to have a complete and finished product to have protectable intellectual property. A technology or method that is used as a component of a larger product is also intellectual property that should be protected. Other types of intellectual property include logos, domain names, manufacturing and business processes, software programs and basically anything that has economic value and is not generally known by your competitors, commonly referred to as a “trade secret.”

So, once you identify what intellectual property you have, what do you do to protect it? A written contract is a must with each and every third party that touches your product or service in any way that allows them to make, use or sell anything that contains your intellectual property. This is what is known as a “license.” What does that contract have to say? Generally, the contract must do the following: (i) identify the intellectual property; (ii) identify what the third party is permitted to do with that intellectual property; (iii) identify the territory in which that third party is allowed to do the permitted activities; (iv) is this license and permitted activity exclusive to this third party (which in the vast majority of the cases is no since exclusive license means exclusive use, and this would exclude even you, the owner of the intellectual property, from doing the permitted activities as well); (v) is the license to this permitted activity assignable to others? (in most cases this is no so that you can control who has rights to your intellectual property or at most you are extending a pass-through license from the distributor to the end user who purchases your product); and (vi) duration of the license. You will also want to identify if this is a royalty-bearing license or how the finances of the business relationship will work, but this naturally will be part of the business deal and the resulting contract.

Most view “licenses” as being required only if you are licensing technology to or from another to incorporate into another party’s product or technology. As with the notion of what most believe intellectual property is, this is only a small percentage of applicable scenarios. Any time a third party uses, makes or sells anything that contains your intellectual property you must include a “license” that lays out the items referenced above in order to properly and fully protect your rights in your own intellectual property. One thing to remember is that if you give any third party a license to your intellectual property for any purpose, you are sharing the rights to your intellectual property with others. This means that you – the owner of your intellectual property – do not have exclusive use of your own intellectual property. This is not a bad thing, and in fact is actually necessary in order to do business productively in the market, but it is important to realize the implications of how you do business and remain cognizant and in control of who has use of or rights to your intellectual property and in what circumstances.

The Business Relationships & Intellectual Property License Implications

Now that you have identified the intellectual property you have and determined you want to utilize the business models of others to assist in bringing your product to the marketplace, how do you know which business relationships require licenses and why? Ask yourself the following questions: (1) will this third party “use” my intellectual property in any way -- will they be involved in adding onto your intellectual property or incorporating it into their own product or technology or will they be using your intellectual property’s functionality in any way (including customers who purchase your product); (2) will this third party “make” my intellectual property – will they be assisting you in making or developing your own product in any way, or are you giving them the rights to make your intellectual property as a component of their own; and (3) will this third party “sell” my intellectual property – will they be selling it on your behalf or re-selling it after having purchased it from you?
If any of these answers are yes, then you need a license that dictates what can and cannot be done with your intellectual property, where and for how long, as discussed above in the license terms. To put this in more concrete business details, the following business relationships commonly will be using, making or selling your intellectual property and will require a license component to a written contract outlining the business relationship.

1. Independent Contractors participating in the development of your intellectual property, which include the following:

  • Graphic designers and PR firms developing your trademarks and logos
  • Engineers who participate in any of the software or other development of your technology and/or business and technical processes
  • Website development

These contract terms must contain the terms “work for hire” in order for their development work to be considered owned by you and not by them.

These third parties are involved in “making” and possibly “using” your intellectual property.

2. Toll-Manufacturers who manufacturer your product or a component of your product for you. These relationships also include the following:

  • Re-packagers
  • Finishers

These third parties are involved in “making” and possibly “using” your intellectual property.

3. Distributors and other resellers of your product or of a product containing your intellectual property. These relationships include the following:

  • OEMs – those who purchase your component or product or technology to either resell as is or to incorporate into their product.
  • Private Labelers – those who purchase your product to resell as their product under a different label
  • Value-Added reseller – those who take your product or component and add something or some additional use and then resell it as a slightly different product.
  • Any other party, whether an independent representative or otherwise who takes possession and ownership of your product or technology and sells or re-sells it to others.

These third parties are involved in “selling” and possibly “using” your intellectual property.

4. Customers to whom you sell or to whom others sell your product or a product incorporating your intellectual property:

These third parties “use” your intellectual property.


The current economic environment does not have to derail plans for expanding and implementing your business model. You can still move business forward with a little creativity and strategic partnering. Evaluate what features of your business plans are most important. For example, do you want to: (i) own exclusively the intellectual property, or are you fine to license it from another or to another; (ii) keep all development expertise in-house as employees or leverage the expertise of others; (iii) have the direct sales relationship with the end-user customer or greater market penetration; (iv) gain a higher profit margin for each sale or greater market penetration; (v) have exclusivity in the market-place with your technology or product or have a co-labeled or multiple labeled presence with greater market penetration; (vi) control and dictate every step in the development or manufacturing process and sell retail or wholesale or allow others to do this and get a smaller license royalty fee, but possibly greater market penetration of your product and a larger number of sales on which this license fee would be based.
There are many options for partnering with others to leverage the skills, businesses, contacts and capabilities of others for your benefit. The key is to understand what is most important to you, be sure you have identified your intellectual property, who has access to it for what purpose, and document all permissions and restrictions in a written contract. Having an in-house attorney, whether part-time or full-time, who has the knowledge of your business to help identify the possibilities and structure these relationships would be very valuable to your business.