The Elements of Structuring a Licensing Deal

Negotiating a licensing deal can be a difficult undertaking, with a variety of challenges to overcome and options to include, such as whether to opt for an exclusive or non-exclusive agreement and what payment structure to choose. Here, we will discuss some options to consider when setting up your next deal.

Geographical Scope

Defining the territory where the intellectual property (IP) can be used is often one of the first steps to consider. These are fully set out within the agreement, often being either on a global scale, encompassing a select region (such as the European Union) or being restricted to a particular country, as shown in the example deal below. This scope may depend on the licensee’s organizational motivations, such as targeting a region where they see strong growth potential or addressing a weaker market.

Harbor BioSciences & China State Institute of Pharmaceutical Industry License Agreement (available on Biotechgate)

Exclusive Deals

Exclusive license agreements grant the licensee full rights to the asset or technology involved and are commonly found in drug development candidates. An example of this is the agreement between NuPotential and Salarius Pharmaceuticals, as shown in the full contract available in the Biotechgate License Agreements section.

NuPotential, Inc. & Salarius Pharmaceuticals, Inc. License Agreement (available on Biotechgate)

Negotiating an exclusive deal comes with the cost of paying a higher price for that exclusivity. Licenses serve as a barrier to entry to the biopharma market, with exclusive licenses enabling a concrete competitive advantage in contrast to non-exclusive ones, which solely allow operational freedom and, in turn, are often less valuable.

Non-Exclusive Deals

While exclusive licenses are of course desired by companies seeking a competitive advantage, the price for one can come at a significant premium. A licensor may find non-exclusive licensing more beneficial in terms of maximizing the potential of their IP, with the approach being useful if they want to capture as much market share as possible across different regions or industries. However, they must consider the demand for the asset and if a single exclusive licensee can exploit an IP’s potential more so than if the asset was in the hands of several different licensees.

Non-exclusive deals are common in sectors like medical devices and diagnostics, where multiple companies can benefit from the same technology.

Costs

Costs are one of the key challenges when structuring your licensing deal. As mentioned above, an exclusive deal would command a higher price than that of a non-exclusive one. Yet this is not the only issue, with the payment structure being equally important to the agreement.

Upfront Payments

One potential avenue is upfront payments, although these used on their own as part of a deal can be too costly and risky for pharma products. Possible challenges for the asset at hand are regulatory restrictions, a change in consumer behavior and the overall competitive environment shifting – all potentially harming sales. As a result of this, the upfront payment can thus lose value for the licensor while also penalizing the licensee.

Milestones and Royalties

A better alternative is staged payments consisting of milestones, royalties, or a combination of both. In most cases, milestone payments are divided into two categories – development and commercial payments.

Royalty payments are often based on the Annual Net Sales of the product, consisting of different tiers where the rate is granted depending on sales reaching the specified threshold. Using this tier structure for royalties can serve as an incentive for the company to focus greater attention and resources on the asset, while also helping to spread the risk across both the licensor and licensee. This also provides some degree of safety to the licensor, with them still being compensated in the event of poor market performance.

Ion Channel Innovations, LLC & Urovant Sciences, GmbH (available on Biotechgate)

While this helps mitigate risk, a licensor must ensure that their organization can financially withstand the spacing of these payments during the product’s development time, which can be up to 10 years.

One increasingly popular approach is the option-to-license agreement, where companies pay a fee to reserve the right to negotiate a full license at a later stage. This allows both parties to assess market conditions and product development before committing to a full deal.

Overall, your license agreement should be flexible, including a combination of different payment types into the deal structure to ward off risk, such as a mixture of upfront, milestone and royalty payments. Deciding on whether a deal should be exclusive or non-exclusive is dependent on your organization’s budget and your overall business development strategy. All in all, ensure that your licensing deal works in tandem with the risk and reward nature of the biotech and pharma industry.

A set of three sample license agreements for reference, closed between 2017 to 2020, are available to download for free on our website.