Licensing from a legal perspective
In the last few years, major pharmaceutical companies have been keeping a sharp lookout for new technologies and developments that could help them strengthen research project pipelines, and developments at biotech companies have been of particular interest. Early recognition of such developments can allow a company both to secure new technologies and help compensate for often insufficiently stoked R&D pipelines and expiring patent protection for blockbuster products. The current trend in the industry is to enter into license agreements at an early stage – during clinical Phase I or even in the preclinical phase. To a great extent, complex agreements have now replaced inflexible M&A transactions.
The currently preferred “in-licensing” model has the advantage of greater flexibility and lower cost compared to the acquisition of a biotech company in the context of an M&A transaction. Thus no cost-consuming due diligence for the entire company is necessary, since only the technology for which a license is to be acquired needs to be evaluated. Terminating a license agreement with a biotech company if a project fails is also easier and more flexible in the context of a license transaction than the disinvestment of the equity interest in a company. What is remarkable against this backdrop is the relatively recent trend for license transactions to take place at a very early stage. Not long ago, licensing projects for drug candidates mainly involved compounds that were at least in Phase II of a clinical trial. The norm now is to strike much earlier – often in the preclinical phase. In-licensing projects at an early stage makes sense for Big Pharma companies , because it allows them to take advantage of scientific expertise in out-of-house biotech firms in the context of developing the technology for which a license has been acquired – for example, through a greater integration of the license-granting biotech companies as R&D service providers.
In the early project phase, tailored confidentiality agreements and term sheets that cover all key issues are absolutely essential. Signing a confidentiality agreement early on should already be a consideration in the start-up phase of a license transaction, as it helps ensure the best possible protection for the information and development results that will be disclosed by the biotech company in the context of due diligence. This includes signing a tailored confidentiality agreement and securing complete and reliable documentation regarding the documents provided. It is also important to establish good standard operating procedures (SOPs) in the companies involved. To make it easier to provide proof, if necessary, the confidentiality agreement should also stipulate that information which is to be kept confidential is clearly marked as such before disclosing it to the contracting party. In order to make the negotiations during the license transaction as efficient as possible, the preparation of a term sheet should also be considered. A term sheet ensures that the contracting parties are already fully aware of the key issues in the early stages of the negotiations, thereby preventing “deal-breakers” from popping up during late-stage contract negotiations that could easily have been identified earlier. What matters from a legal standpoint when it comes to the negotiation of a term sheet is whether – and if so, which – stipulations in the term sheet should be binding for the parties. The binding definition of the basic commercial conditions in a term sheet can lead to a substantially faster execution of a license agreement following the signing of the term sheet.
Negotiations on the
Frequently the parties’ diverging ideas about the consideration represent the first obstacle during contract negotiations. In this context, Big Pharma companies are usually interested in paying the consideration for the granted license – for instance, in the form of one-time milestone payments or recurring royalty payments – only once the drug is marketed. The biotechnology company, on the other hand, is interested in an almost immediate payment stream in order to cover at least part of its financing needs with income from the licensing project. This can be a major stumbling block with projects that are still in the pre-clinical phase or in Phase I of a clinical trial.
Minimising the risk of insolvency
In looking at this issue, one should not forget that the flow of sufficient financial resources to the biotechnology company is also essential for the Big Pharma partner, because insolvency on the part of the biotech company as licensor could have serious consequences under the current legal situation. It could even result in a situation where the pharmaceutical company loses its further right to use the license. Various contractual stipulations are possible that can help minimise the risks for the pharmaceutical company as licensee. For example, if the biotech company is forced into insolvency, the device of usufruct in favour of the licensee is often employed. Another option is a contractual stipulation that the originally licensed patent is assigned by the licensor to the licensee only after the product has reached a pre-determined development goal. From the viewpoint of company law, the establishment of a separate company (either as a wholly-owned subsidiary of the licensor or as a company in which both the licensor and the licensee have an equity interest), with the simultaneous transfer of the technology and of any associated intellectual property rights as a contribution in kind into said company, is often discussed.
Large pharmaceutical companies in particular expect to be granted wide-ranging rights of termination in the license agreement if the project does not turn out as hoped. Biotech companies prefer long-term partners that will stay the course, and can work toward that goal – for example, by including so-called “best effort” clauses in the agreement, in which certain obligations to cooperate are imposed on the pharmaceutical company. There is also the option of assigning the research results compiled during the license agreement to the biotech company in cases where the pharmaceutical company terminates. This at least gives the biotech company the option of continuing the project with another partner, even if it causes an unwelcome delay.
To sum it up
Work on the practical and legal design of a licensing project should begin at an early stage. The peculiarities of each individual case should be considered when negotiating confidentiality agreements and term sheets. Possible deal-breakers should be identified as quickly as possible and turned into a reasonable contractual solution that is acceptable to both contracting parties. If all those bases are covered, then nothing stands in the way of a successful license transaction.D
Dr. Stefanie Greifeneder
Raupach & Wollert-Elmendorff
60486 Frankfurt am Main, Germany
Tel: +49 (0)69 7191884 0
Fax: +49 (0)69 7191884 4