Project Medtech Episode 152 | featuring Edward Steakley, Managing Partner at Cognition IP and Devon Campbell, Founder at Prodct
Duane: Hello, everybody. I’m Duane Mancini. Welcome to another episode of the Project Medtech podcast. If you need anything from us or would like to suggest a future guest, you can email us at Info at ProjectMedtech dot com. If you enjoy this podcast, please subscribe and leave a review. For more information on Project Medtech events we host or consulting and advisory services, sign up for our monthly newsletter. Visit our website www. Project Medtech .com and follow us on LinkedIn. If you’re enjoying this content, don’t forget to check out our other podcast by searching Medtech Money on your favorite podcast platform or by heading to our website. Medtech Money is an interview style podcast focused on demystifying raising and investing capital for medtech companies.
We have another event coming up this year, the Startup Symposium in Houston, Texas, October 25 through the 26th. If you’re a medtech company and you’re in the startup ecosystem, you’re not going to want to miss it. Whether you’re a service provider, investor or startup, you’re going to want to be there. Use the code PM20 for 20% off your ticket. Speaking of the startup symposium, we are grateful for our sponsorship from Velentium, who has sponsored both the Midwest showcase and the startup symposium this year. They are also a sponsor of this podcast. Velentium is a contract design and manufacturing firm specializing in end to end development, production and post market support of diagnostic and therapeutic active medical devices, especially active implantable and other class three medical devices. Their core competencies include electrical engineering and design, mechanical engineering and design, embedded software, software as a medical device, mobile apps, apps, cGMP contract manufacturing, embedded cybersecurity, Systems Engineering, human factors and feasibility and usability, automated test systems and so much more. With customers all over the world Velentium works with clients in every state and situation ranging from startups seeking funding to established Fortune 100 companies. Visit Velentium.com to explore your next step in medical device development.
In this episode, it is our second of our three part series. Our guests are Edward Steakley at Cognition IP, and Devon Campbell at Prodct, and myself discussing intellectual property patents, trade secrets, strategy around these topics, why they are so important and so much more.
Devon and Ed, welcome to the podcast.
Ed & Devon: Thanks for having us.
Duane: Absolutely. So Devon, I’ll start with you and then we’ll go to Ed. Devon is our first four-time podcast guest now with this episode. We did a three part series back in the 47-48-49 range of the podcast series. We are now at episode 150 plus depending on when this airs. So if you’re listening, you should go check out Devon’s old episodes as well. But Devon, introduce yourself, who you are and what you do.
Devon: I think one of those episodes is in your top 10!
Duane: For sure, we try to break down our top 10s because it’s unfair for people who were on earlier, before we have the audience we did. So we try to break it down a little bit. Yours is one of our most popular first half of the podcast evolution episodes. It’s pretty awesome.
Devon: Maybe I should just quit while I’m ahead and just not talk the rest of this episode.
Duane: No, no, no, no, you’re good because this one’s going to be even more than the other ones.
Devon: Sure, so me in a nutshell, I’m a mechanical engineer. I’ve been in the medical device industry since the 90s. I’ve been very lucky to have been a part of a lot of very cool companies with awesome trajectories, generating a lot of patents and great medical devices that have touched the lives of a lot of patients. I’ve been blessed with the opportunity to be involved in three exits during that time. After my second of three exits, I started Prodct, my own advisory firm to help emerging entrepreneurs in earlier stage med tech, medical device and device therapeutic companies.
We ask the questions like what’s in the future? How do we strategically build for a successful launch and an exit? We look at what we’re doing now and what we need to do later and build that strategy. Then we roll up our sleeves and build some of the infrastructure.
Duane: Awesome. I appreciate the intro and Ed..
Ed: Thank you, Duane. A little bit about me. I’ve been practicing intellectual property law for over 23 years. During that time, I’ve worked for large law firms, Fortune 5 companies, I was a Senior Patent Counsel at Apple for many years, I’ve been head of IP at a startup and then various other companies where I was Head of Trademarks. So over these years, I’ve seen most of the different possible situations and issues with intellectual property, patents, trademarks, copyrights and trade secrets. Currently I am head of the law firm Cognition IP, which is actually a hybrid company in that we have a technology company and a pursuit as a boutique law firm. Cognition IP actually started out of Y Combinator in winter of 2018. So we’ve now been around several years and it’s been interesting to see a lot of technology development. From our perspective, we focus on helping early stage companies with strategy, securing and protecting their intellectual property on a cost-effective basis.
FDA Considerations & 510K
Duane: Great, I appreciate the backgrounds. So we’re going to hop right into this one. From a layman’s perspective, 80% of devices that come to market in a given year are 510k products, which by a regulatory definition, means you’re substantially equivalent to something else on the market. Now, when I started learning about patents, and what’s patentable, it confused me because, well, how can you get a patent if you’re substantially equivalent to something else? This is me being very basic in terms of the definition but I’m curious if you can lay some kind of groundwork in terms of the USPTO patentability versus 510k predicate devices and make some sense of this to start.
Ed: Devon, maybe you could give a quick background about the predicate devices and approval and then I can tie that into the ability to patent and the need to understand whether patents exist or not.
Devon: So, I’m not talking about de novo or PMA. You’re demonstrating that the product you’re bringing is substantially equivalent to the other devices. You might choose a particular predicate device, generally the most recent one that has been cleared, but you can also choose other comparative devices out there that are maybe more appropriate to you, and also within the FDAs purview, other prior 510k’s. When you do that, you demonstrate to the FDA with objective evidence that your product is as safe and as effective, if not better. We’re not looking for better, we’re looking for substantially equivalent, and this is as safe and effective as the other products on market. Then you’re basically going to the FDA to say “do you agree with that?” and “do you approve our ability to market this product?” They take a look at all the data and come back and say “yep, we believe that you’ve done enough studies, everything’s substantially equivalent, you’re as good as the other things that you’ve called out as predicate devices or as comparable devices. Go ahead.” So, in a super abbreviated version that’s kind of the idea.
Duane: I wish the process was that easy!
Ed: Right! That’s a good foundation to tie in to patents. So a predicate device, then you’re looking for a substantially equivalent type of functionality on which you can base your developed device. When we think about the patent, we need to think of two different areas. One is infringement, and the other is patentability.
So when a company develops new technology, it’s important to understand whether or not the technology infringes another patent. With respect to trying to get FDA approval for a predicate, or based on a predicate device, it is very possible that the predicate device may have patents that actually cover that device. So it’s very important to understand if there are such patents that exist, because if there is a patent existing, while one could get FDA approval, without either a license to that patent or ownership of that earlier patent, that could prevent one from commercializing that technology.
So that’s something one should consider with a predicate predicate device when you submit something that’s substantially equivalent. That could be basically the company saying that we infringe because we are similar to this patent, or to this technology, which may have a patent that underlies the initial predicate device. Patents exist for a period of 20 years from an initial Patent Application Filing, so they could be patents out there for many, many years.
From the standpoint of patentability, regarding a substantially equivalent product, you would need similar functionality in your device as to the predicate device for FDA approval. However, a patent application may include additional functionality to be implemented in a future product. For example, you can obtain a patent for new improved functionality of the predicate device.
Devon: You can also have some room there, too when you’ve got a device that does the same thing. Think of it like an in-vitro diagnostic. It makes the same measurement, has the same sensitivity specificity, has all the same performance criteria on the other device, but maybe uses a completely different technology to get there. So with a 510k pathway, your predicate device might achieve the same thing but differently than your technology. In the end, you can both produce the same clinical data, and you’re demonstrating that you do produce the same clinical data and you’re as accurate and as sensitive as they are. That’s also obviously a space where you have lots of fertile ground for patents.
Duane: Awesome. Tell me a little bit about de novo from an IP perspective. From a regulatory standpoint of de novo, you’re not a PMA, so you’re not a class three medical device, but there’s nothing else substantial equivalent on the market. You’re doing something new and novel, so from an IP perspective, you should be ok, right? Ed, maybe you could educate us on that with some of the considerations there.
Ed: When I think of a new product that’s not on the market or not approved, maybe there is new functionality that doesn’t exist in other products that can be patented. From a patentability standpoint, it’s important to understand the patent landscape, so you’re staying clear of potential infringement of other patents that might be out there. This is where Freedom to Operate (FTO) can help and remember it does take quite some time for de novo products to be approved through the FDA. It could be that someone else has submitted an application for their device which is similar to yours. So whether you have a device you’re trying to move quickly through a predicate device or a de novo device, it’s very, very important to understand if there are patents that might exist, or pending applications that might cover the new product.
Duane: Devon, you go ahead.
Freedom to Operate (FTO)
Devon: This is part of the arc of our three part conversation. As a company is trying to prepare themselves for fundraising and secure a Series A or Series B round or even earlier Seed stage rounds, it’s important to ask and I say this having performed diligence on behalf of a very big VC, “If you haven’t patented yet, have you at least done your Freedom to Operate (FTO) analysis.. and is it well informed?”
There’s a difference between just Googling as a patent search and having a professional, someone like Cognition IP come in, and help you do that in a more thorough way. If you don’t know your patentability stance, it’s one of those red flags where I would say, “Well, wait a second, if you don’t really know if haven’t done a patentability analysis, why would we throw money at this and fuel that fire, when in the end, we might not have the path available?”
Duane: So FTO is an important point to dwell on. Ed as you mentioned, Freedom to Operate. What is Freedom to Operate and when should you be thinking about this as a startup? Surely, before Series A?
Ed: Sure, so a Freedom to Operate is a formal search performed by a patent attorney, intellectual property law firm or a patent search service. What they’re looking for are patent applications that are pending or issued, which might be related, or cover the newly developed technology or product. The Freedom to Operate is a process by which the patent attorney or the firm will review the patents or patent applications found, and assess the relevance regarding the proposed product. So what we’re trying to do is see if there is a previous patent you should be concerned about, and decide what we need to do about it. I’ll get to that in a second. I think it’s very important for medical device startups to do a Freedom to Operate search and analysis very early on, because if you find a problem, it could block your technology, and that’s not good at all.
Devon: It’s also not an all or nothing situation. Let’s say you’re a really small startup, you’ve got some grant or seed money, and you don’t necessarily have the funds to go and hire a professional yet to do it. I would rather you at least try to do some patent searches on your own to find something that clearly is exactly what you’re trying to do. Then at least you found it. If you can find those obvious ‘no’s’ it makes sense to generally find those yourself, if you spend a little time learning how to search the patent databases and how to understand the material that’s out there.
It’s those adjacent technologies, the things that are close to you, or maybe in a different industry, maybe a lane or two next to you where I think bringing in a professional helps. Let’s say someone is doing water testing or something like that, using a very similar technology, and you’re thinking very narrowly about medical device, without a patent landscape search you may not think to look there.
If I’m doing diligence, I want to see that you’ve at least done some analysis and you acknowledge the fact that you’re going to need to do more. Maybe that’s part of what your raise is for. One of the first things we’ll do is typically a more exhaustive FTO analysis once the raise is complete. In the end, if you were to hang your hat completely on a self-driven patent search and you don’t know what you’re doing, that would be a bit of a red flag.
Duane: Got it. So if I looked at FTO and I translate it to other areas of my startup’s business, this is like that initial reimbursement assessment or regulatory assessment that is going to inform my plan throughout the lifecycle my company, correct?
Devon: That’s correct.
Duane: Great, so we’ve got shaking heads. Perfect. That’s what we need. So once you’ve evaluated this and you have your Freedom to Operate and landscape assessment, you should understand how to move forward, right? What are the next steps from there?
Ed: When a patent search is done, it’s very useful information. There are patent landscape searches, patentability searches, Freedom to Operate, ultimately these can all help with an understanding of existing patents, and which companies are filing. So with that intelligence you might learn about other companies, and potential competitors. From that standpoint, it’s useful information.
What’s really interesting, though, is what you do with the insights. I’ve worked with many companies which found problematic existing patents, but then, upon dissecting it, we were able to identify some specific requirements in the patent claims, or even engineer around those patents.
So, if you become sophisticated in using the Freedom to Operate searching, even finding problematic patents isn’t the end of the road. Like Devon said, you may still be able to design your product slightly around it. If you can’t, there may be an opportunity to license patent rights from the owner. So this is a really important process early on in the company, you benefit in many ways from doing the search.
Devon: Let me jump on that a little bit. So with my first company, I joined out of my masters and I was there for a long time. We were great at bringing lots of in vitro diagnostic tissue based products to market. One of the things I learned early as a contributing engineer there, also as a leader, is how to use our own patents. We know other people are doing the same thing so we’d ask “How can we work around this patent? How do we bring this next product to market in a way that we can work around our own existing patents?” If we need to, of course we’ll use our existing patents and we should exploit them as we can, But maybe we go around it, do a little bit of work, and then maybe find something to patent there. My point here is that FTO gives you the opportunity to not just understand the landscape for bringing your product to market, but also how you can use your own IP, and specifically how to use patents to block potential competitors in the medical device space. You may even limit how much use they can derive because you’ve patented around it. So, FTO can be a great strategic move. As an executive I might say, “Well, we can do this and this but we’re not going down this route. And here we might as well try to patent and see if we can get large enough claims to set up a blocking path.”
The Value of IP
Duane: I’m glad you jumped on this, as a segway to my next question. For a product person, thinking about commercialization, I want to know, how to get what I desire within a less regulated space. Is there a way to get what I desire and also get reimbursements or think about those things? So my next question, Devon, you have already answered it, but it was “How as a product person, do I think about patents and successful commercialization?” Commercialization for all intensive purposes is that valley of death. Just getting people to actually purchase your product is difficult. If I’m a startup company, great that I can block competitors from getting to market, but my main goal is just to exit after my first product and be done with it, right? Understanding during M&A patents are fairly important, do you want to touch on that piece too?
Ed: I can start first. So with my experience, I’ve been involved in many acquisitions and the value of patents has its place. When the acquiring company looks at that, they do want to know what is there to protect the technology. With that said, though, I think most acquiring companies are looking for the technology and the talent, the people of the company first, for an acquisition. But having the patents really do add a feather to the cap or add a lot more value. It is concrete and definitive.
Duane: When we talk to companies about going through an exit, we explore what adds value and what just holds value. For me, a QMS is a great example of something that just doesn’t deter from value. But that’s an area where if your QMS is enough to be what it needs to be, a strategic and go, “Boy, that’s gonna be a lot of work. You know what? You’re probably only worth this.” But if you have a QMS, you probably maintain, are patents a value increase for you when you get to an exit, Devon?
Devon: Let’s expand the topic of discussion just a little bit, and you can ask that same question again. It’s not, “is it patents that do that?” It’s really “does the IP strategy do that?” Because your IP strategy is not necessarily exclusive to patents. There are things you may choose not to patent but maintain as a trade secret. An acquiring company or even just a VC, someone who’s actually looking at putting money into it, is going to look at those two things, not just the patent.
Patent & Trade Secret Considerations
Duane: Ok, so the next logical question here. So IP does increase value along with a number of other things, commercial traction, all this kind of good stuff. But it’s like we had a plan for what we wanted to talk about. What is the difference between a patent and a trade secret?
Ed: The primary difference between a patent and a trade secret is that a patent is a formal registered intellectual property at a patent office. A patent has to be applied for and protected in each country where you want that protection. As part of that, you have to disclose whatever your technology is.
A trade secret, on the other hand, is information that a company does not want publicly known: how you operate your manufacturing processes, different types of information and data. A trade secret can be protected in so much as you put in place a lot of procedures, contracts, nondisclosure agreements to maintain the secret. A good example is the Coca-Cola recipe. It’s not known because they’ve put a lot of procedures in place, so that it is maintained as a trade secret. Both can be tools for generating revenue.
In enforceability, with a patent, you sue for patent infringement. You have to assert the right to get recourse. For a trade secret, you’re probably suing for breach of confidentiality or a similar cause of action if a party has agreed to keep the secret but then discloses that secret.
Duane: Fantastic. Anything to add there, Devon?
Devon: You might have situations where a company that is going to be regulated by the FDA is trying to think very meticulously and carefully through their go to market strategy, which includes the regulatory landscape, the patent landscape, everything. You know, at some point, those two things are going to combine.
You might think to yourself, “Well wait a second, I’m going to have to share with the FDA certain pieces of information that might expose what’s going on within my area that I’m choosing not to patent, or keep as a trade secret, especially if it’s something that somebody else might build upon.”
Maybe more in the drug space, but I think a lot of people in the device space don’t necessarily understand the idea of master files, and device master files for the FDA. With these, you can, in a very secure and confidential way, share a bunch of information, say, the special juice that we’re making. You can share your SOPs, your work instructions, your validation for that special juice. If it’s in a master file, the FDA can review it and get back to you, but it’s just between you and them. And in a way to be able to make sure that the work that you’re doing is something you can take credit for, without exposing yourself too much to the world that you release, you release the information that you need that you want to keep secret. Ed, any thoughts on that?
Ed: I think one way to look at this is that for trade secret protection, anything you don’t want the public to know, you have to put procedures in place to maintain that confidentiality. This goes for any information one provides to the public: marketing material on one’s website, the device itself, anything that can be reverse engineered in a product, the technology whatever it might be. You should know it’s a requirement to maintain a trade secret, and there are layers of procedures one has to put in place to keep it confidential.
Another point here, if there is something about to be publicly disclosed, that’s the decision point to consider patenting. While we haven’t discussed types of patents yet, for industrial design or products, when anything is released, if it is disclosed without filing your patent application, it can be an absolute bar in most countries in the world from subsequently filing. So, it’s very important to consider before releases in the product lifecycles.
Duane: Ok, so before we get into universities and contract manufacturers, can we talk a little bit about the different kinds of patents that you just alluded to? I don’t know if this is part of the same question, but patents in the US versus what protects you globally, and the different areas of that. When we get to the global piece, I’ll have some more questions there too.
Ed: There are different types of patents. Basically, there are patents that cover processes, a method of doing something, patents that cover a device be it a physical device or structure, and that can be in the same patent, and the patent has a set of claims that describe what the invention is.
So there are process patents that might cover the process of performing some diagnostic method. There could be a process of a medical device that’s performing some operation. There could be a patent that covers a medical device as to the structures and the components and an interaction of the components to the operation. There are also patents that cover composition. So there are a lot of unique chemistries that are used with medical devices and in that, should be considered. So there are a lot of different types of coverage of a patent, but primarily, you have your device, the physical device itself, and then a process of doing something. Also, you can obtain patent protection on the process of manufacturing devices, if there’s something unique about that or creating some type of chemical formulation.
Devon: I would add that, in the device space, where I see most of my clients exploring trade secrets, it’s usually in the manufacturing processes. For example, the secret way to mix these constituents together, if you do it in these proportions, mixed in these ways, and you heat it in these ways, it makes everything work really well. So in the manufacturing processes, if you’re going to explore trade secrets, that is generally where I see companies take that route.
CMO, CDO & CDMO
Duane: Okay, good. So let’s actually pause there, I’ll come back to my other questions, because this probably leads into contract manufacturing a little bit. So if you’re talking about this area, Devon and Ed, I don’t know who answers this first, how do you work with a contract manufacturer to build this into your IP portfolio? Because you’re asking a contract manufacturer to make a small lot of something, but you need to share some of those trade secrets. So how do we continue to build this IP portfolio in a way that protects all of us, right? Because I’m sure it’s mutually beneficial for the CMO as well as they want to see you become successful because you’re their client. So I don’t know who wants to kick it off there. But I’m curious on how this relationship evolves, I think it’s Devon, with a contract manufacturer.
Devon: I would proceed with extreme caution. If there’s something you’re trying to keep as a trade secret, and you have a relationship with a CMO, you may choose to do that one special operation yourself and then become a supplier of material to your own CMO. That way you can really keep it in-house.
If you’re not going to do that because you don’t have the capabilities, or you don’t want to build out the capabilities, maybe you want to exit without any brick and mortar, then it comes down to very, very strong contracts between you and the CMO. You want to have a very strong and well worded SQA (Supplier Quality Agreement.)
It also comes down to you doing enough diligence on that CMO to understand if you can trust them, even with a really good contract or SQA in place. You owe it to yourself to do enough diligence, to know if you can really trust these guys. Do they maintain secrets for a whole bunch of other companies? Do they have a lot to lose if they were to violate the contract? If they violate the contract, maybe they don’t have a lot to lose, but you do. If they don’t have great safeguards in place and you didn’t do enough auditing to understand that, you’re kind of screwed.
So I would be really, really careful using the CMO. It doesn’t mean that you can’t do it, you absolutely can use a CMO, and there are lots of world class CMOs out there that have experience. But I would make sure you have really good contractual coverage and really good diligence on that company to understand if you feel comfortable using them. You’re keeping your secrets for a reason. Be really careful about putting your idea in anybody else’s hands that could expose your secrets.
Duane: Understood, and the point of this podcast is trying to get us in the mindset of “what should I be thinking about when I’m going through these steps?” We all know there are a bunch of different scenarios out there, but what are the things worth considering? So this is really important, what Devon is hitting on it now. A lot of people start discussions with contract manufacturers, and there is always something in there about IP and patents, who owns what, and how it’s broken down. So to your point Devon, just be careful. There are ways to determine what could be a trade secret and what might be an X factor for you. Think about different ways of protecting that. I love the thought there. Ed, do you have anything to add to that?
Ed: I think I can harp again on the confidentiality of IP and these agreements. Very importantly, again, is nailing down the confidentiality of what you said, who owns what, because with a process that is being developed, this other company may have improvements to the process, whatever that might be, and it’s very important to know who owns that improvement.
There’s a lot of negotiation, typically in some of these areas about who owns what and who brings what IP into one of these manufacturing processes. So, it is very important to ensure that you have ownership of what this manufacturer might develop, and also the country in which they are manufacturing in. You might not want to go with manufacturing in some countries because the laws there are not very strong, so that’s an important consideration as well.
Devon: Can I build on that just a little bit? So Ed was talking about using a manufacturer as a CMO, how they could potentially improve your product, and making sure that you have a very clear understanding before you get into the relationship with your CMO. If the CMO comes up with improvements, they may own it, right? Sure, we’ll put your name on the patent, thank you for that, but the CMO may own it and it gets transferred to them very soon. Ed was talking about them developing improvements into your product.
When we’re talking about a contract development organization or CDO, you obviously want to own everything they develop. I’ve seen cases where that didn’t happen. Startups can get themselves in situations where they don’t own everything even though they just paid the organization to develop their stuff, because of the way the contracts were written.
So let’s also point out, for anyone looking down that route, that when you’re putting contracts in place with larger, experienced CDOs, you have to be careful to either choose or choose not to allow them to build their patented technologies into your product. A CDO might have certain technologies that they’ve developed over the years that they design into yours. Then you may have to secure licenses to use their IP moving forward on IP that’s theirs, not yours. If you then make improvements, it can get really messy if you haven’t laid out the expectations and responsibilities of everyone up front.
My personal preference is to avoid situations where the CDO uses their proprietary technology, unless we get very clear terms up front that we can use it for all we want to and there’s no royalty. We get all the rights to use moving forward.
Provisional Patent Application & International Filings
Duane: Ok super helpful. I know I asked a large question and we went into the CMO and CDO topic. But from a global patent standpoint, first in the US, Ed, maybe you can make sense of the provisional patent. What’s the timing there and what does it mean to have an issued patent? Then as far as international, do you have to continue? Do you go to Europe, China and then Japan? For regulatory, you can submit in the US, then Canada, EU, then China and Japan. They’re all different but there’s some overlap. Walk me through some of that landscape.
Ed: I think generally when we’re talking about IP strategy for protection of a company’s product, often, while a company is developing a technology, there are tools that can be used with regard to the type of patent application that is filed. One of those tools is a provisional patent application. There are benefits as it allows one to update the patent application basically, within a year, and add more material to it. Sometimes, in the case of Life Sciences type of technologies, typically you need some type of data to support some type of method of some type of technology to cure some type of disease. But typically with a provisional application, it’s something that you can use, append and add more material to it. At some point, you have to file what’s called a non-provisional application and what that does is basically locks into place the tech, the metes and bounds, the description of what that technology is, what it does and how it does it.
The strategy for filing an application around the world, regardless if you’re in Europe, the US, China or anywhere, typically, where the company is located is where that first application is filed. Then one has to consider, where else to file and you have basically a year to decide from that original filing, to do that.
There are two approaches. One is called a PCT or Patent Cooperation Treaty application that effectively gives you another 18 months to kick the can down the road and file in other countries. Or within that first year, you can file directly in other countries. Like I said before, to protect technology, one has to file a patent application in the country where you want to protect that technology. So it does become cost prohibitive to file in many countries. As part of this IP strategy, one really does need to understand those countries, jurisdictions where the product will be sold or used. Often, that means filing in a handful of countries, where you think the product will ultimately be sold or used, or receive approval. In the countries that don’t have patent protection, someone else is free to actually use that technology in that country.
IP, University & Hospital Organizations
Duane: I have a question. Devon, for you, how important is patent protection? What do you look for at each stage from an investor standpoint? But first, I would really like to cover the university aspect of this as well. You know, I almost hesitated and said, university & hospital. But for the most part, when it is a hospital group, they have an innovation venture arm of the hospital that’s probably spinning off some of these companies and the IP. But within a university, people will tend to look through the IP portfolio and say, “Oh, hey, I want to maybe spin this out.” But there is a strategy to when, and how you spin out the IP from the university. So I don’t know who wants to start, Ed or Devon, but maybe just lay the groundwork for that. What that means, because it’s not always “find IP and license as fast as possible.” I’m just curious about your thoughts there.
Devon: I’m going to pick up where you left off with university & hospital, because it’ll help illustrate the point I want to make here. Sometimes you have to put yourselves in the shoes of the people you’re licensing from. There are organizations, there are universities, who pride themselves on generating a lot of IP. They are businesses that generate a lot of revenue from materials they invent. So with licensing offices from a university like that, they’re used to pushing a ton of tech out, and so is their financial planning. How much money they make from IP they develop and license out, versus, let’s say a much smaller university could be different from one that’s purely research. If their operating budget doesn’t have as much emphasis on the IP side, they’re going to be a bit more flexible in working with you. It’s going to be a little easier to secure the IP you need. I would say the same is generally true for hospitals. All hospitals are businesses but for the most part, they’re not there to spin out as much tech as they possibly can to make money. It may be good for their name, to get some tech out and they may be easier to license from. Not all of them but many of them are a bit easier. I want Ed to get into what it means to really license technology, but when you’re in those negotiations, think “what is the financial motivation for this organization?”
Tech Transfer & Licensing
Ed: Thank you, Devon. I think that was a good distinction for universities that generate a significant amount of revenue from intellectual property. Working with those tech transfer offices can be a little more challenging than other universities, which are more amenable to providing more rights or even full transfer of rights to the inventors of the technology.
Looking again at exit strategy, if someone is looking to invest in your company, they’ll be evaluating the license agreement. Who has the right to continue forward with the technology? What will prevent them from doing that? If license agreements are put in place, how long will you have the right to use the technology? Do you have exclusive rights to use it? What does one have to do as far as performance to continue with that license? What can the university do to claw back the rights? It’s important to have ownership of the rights at some point or to be able to control the destiny of where and how the IP moves forward.
Devon: In fundraising mode, it’s important, but also very important in M&A situations. If part of your startup exit strategy is building it up to a point, exiting and selling to a strategic, let’s say you’re not going to create a giant behemoth of a company and take it public and do all these different things. The strategic is going to look very carefully at where you license your technology from, and what working with that license, or working with the person that’s giving you the license, might look like in the future.
IP, Investors & Due Diligence
Duane: This is going to be a long-winded question for you, Devon, because we’re going through this with a ton of startups right now, that are either currently licensing technology out of universities or already have. We’re having a lot of these discussions, and we have to go through these agreements under a microscope, because there are things throughout the IP lifecycle, which can become huge potholes later down the road. What I’m trying to articulate is, each step of the way, you should be really dialed into your IP standpoint. Whether you’re dealing with a university, filing patents or just figuring out an IP portfolio. Devon, when you’re doing due diligence for the VC or the investor, and you’re looking at all these things, should startups be in a certain place? You’re obviously going back and looking at what they’ve currently done, but when you see a company, do you have milestones in mind for their IP journey? Let’s say based on startup, or raising Series A?
Devon: I wouldn’t tie it to the Series, I would tie it to the maturity of the products and how close it is to being commercial. You might have multiple theories before you can bring an expensive product to market or you could maybe do everything with the Series A. So I don’t think it’s Series specific. I really think it’s maturity and how close to commercialization. That’s what’s most important. If you were to look at the far left side of that spectrum, and say, early startups. Do you have an IP plan that you’re going to follow through on, moving forward with intention and with purpose? If it’s an earlier stage company, and we’re further away from commercialization, I want you to have at least articulated a plan for how you’re going to get FTO done, if you haven’t done it already. If it has been started, how much have you done, and how professional was that work?
I want to know what you’re thinking right now from a patent versus trade secret perspective. Have you thought about those things, are you doing as much research as you can and learning because you’re a startup? We understand you don’t have the money to bring in professionals right away. If your only plan is to build this thing out as a company, maybe you worked on it during your PhD and you don’t really have these plans in place, you’re going to be blindsided by it. If you aren’t thinking about it, it makes me wonder, what else have you not looked at thoroughly. There might be red flags all over the place, now I’m worrying if there’s a pattern of behavior I should be concerned about. At least start by acknowledging what’s important and have some steps planned on how you’re going to be moving towards it. Now, if you’re much closer to having already done your alphas and betas and you’ve done some clinical work, and you’re much closer to launching the product there, I’m going to dive deeper into all of that to make sure that you have really, really robust moats of protection around your technology.
Duane: Awesome. Ed, anything else to add in before closing?
Ed: Adding on to what Devon said about having a plan or at least understanding how you’ll move forward. Understand what your approach to intellectual property is. Don’t let dates and publications of technology go by without considering how you’re going to protect it. Early on, before anything is disclosed, one needs to consider whether to patent. I’ve seen many instances when technology is published, over a year has gone by, and there’s nothing we can do about it. Some companies have a very good idea and they didn’t patent it, and they come back later regretting it. If there’s really interesting technology there, there are ways to file patent applications inexpensively, and we try to work with companies to try to create a cost-effective IP plan so there’s not a lot of upfront expenses for patenting. There are ways to do that. But again, know what your technology is, and make a decision one way or another to patent or not before something is made public.
Duane: Awesome. Something that we need, or startups need, to understand is how the IP portfolio is very important for the duration of their company. When do I think about it? What are the steps? What’s the order in which I need to do things? How does that tie into the rest of the company? I think both of you did a really good job of explaining the thought process and where the gaps lie. As well, where you need to be thinking about it.
This was super helpful for me at least, and hopefully for the listeners. So, with that being said, Ed, Devon, thank you both so much for doing the episode. There’s a lot in here and that’s the beauty of the podcast. You can go back and re-listen as much as you want to.
This will be episode two of the three part series. If you enjoyed this podcast, please subscribe and leave a review. If you need anything from the podcast. You can always contact us at Info at Project Medtech. com, thanks for listening and have a great day.
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