The process of drug development in the life sciences sector often involves collaboration between a number of different parties, with both the process of development and the drugs themselves having become increasingly complex over time. In order to set the framework for collaborative drug development, companies will often enter into licensing arrangements, which govern the use and ownership of certain intellectual property (IP) rights throughout the life of a product.
What is a licensing agreement?
In the context of the life sciences sector, a licensing agreement may set out the terms under which an inventor or proprietor (the licensor) grants a customer (the licensee) rights to use its patents or know-how, often in order to aid the development of a product. A licensor’s IP is a significant asset that is often the result of a number of years of research and development work. Before granting a licence under its IP, a licensor will often carry out in-depth research into a potential licensee by assessing both the commercial benefits and risks of entering into the collaboration. For example, a licensor will wish to ensure its IP will remain protected in the long term and will consider how likely it is that details of the licensed IP may be exposed whilst on licence to the potential licensor.
Licences granted by a licensor can be either exclusive, sole or non-exclusive. Where a licence is exclusive, the licensor agrees not to grant any other licences in respect of the same IP to third parties, nor to use the licensed IP itself. This contrasts with a non-exclusive licence, whereby the licensor may grant other licences for the same IP to third parties, as well as using the licensed IP itself. With a sole licence, both the licensee and licensor can use the licensed IP but it cannot also be licensed out to a third party.
The level of exclusivity granted under a licence can heavily affect the value attributed to it. For example, a licensee will often be willing to pay far greater fees for an exclusive licence than for a non-exclusive licence.
Payments due under a licensing agreement can vary depending on a number of factors, for example the degree of exclusivity granted under the licence (as described above) and the nature of the licensed IP. At the point of entering into the licence, an initial one-off payment is sometimes payable by the licensee. This is particularly common where an exclusive licence is granted, and where the licensor has made a significant investment in developing and protecting the IP.
In addition to any one-off milestone payments – be those upon entering the licence, annual fees or upon achieving certain regulatory hurdles, there are often royalty payment provisions in a licence whereby the licensee pays the licensor royalties calculated as a percentage of the net sale price of any products sold that were made or developed using the licensed IP. Royalty provisions in a licensing agreement can be complex and can vary significantly depending on the sector and the anticipated commercial benefits for each of the parties. The bargaining power of each of the parties is also a significant factor, for example a licensee with a large turnover may be in a position to negotiate a lower royalty rate on the basis that its net sales figure is likely to be higher than a smaller licensee.
Controlling access to the licensed IP
One area of licensing agreements that tends to be heavily negotiated is any provision relating to sublicensing. In order to minimise the risk of its valuable IP and confidential information getting into the unauthorised possession of a third party, a licensor will often request that the IP cannot be sublicensed without its consent. This is particularly common where exclusive, or more valuable, licences are granted and where there is an international element. For example, a licensor may require this provision where a potential licensee is based in a jurisdiction in which the licensor has carried out minimal prior business and where there are less stringent trade secret laws and enforcement, which would ordinarily provide comfort against the risks relating to exposure of confidential IP.