Licensing and collaboration transactions can benefit companies in that they can be customized based on the circumstances of the specific parties, the nature and stage of the applicable asset, and the parties’ respective interests in risk allocation or sharing.
Key considerations that companies should consider when structuring their next licensing or collaboration transaction include:
The Length Of Time It Takes To Develop A Product Can Affect The Structure Of The Deal.
Licensing and collaboration transactions should be structured with the parties sharing responsibilities to optimize for the potential success of both sides. Many complex products can have licensing deals lasting up to 10 or 20 years. As a result, the parties are more willing to work together to protect and block the patent landscape for the products and to coordinate with each other to seek regulatory or marketing exclusivity in the marketplace. A “winner takes all” mentality is rarely successful.
No Deal Is Done In A Vacuum.
When considering whether to pursue a licensing deal, it is important for the licensor to consider how the transaction will affect both the current asset/program and the licensor’s future business opportunities. Some questions for a licensor to consider include:
- Is the relevant asset or program clearly separable, or is it based upon or generated by a broader platform?
- Does the licensor want to hand over the full asset to the licensee to concentrate on other programs?Or does the licensor have unique expertise that will be critical to ensuring the success of the asset before it is transitioned to the licensee?
- Does the licensor want to build a commercial infrastructure?
- Is the licensor willing to share risks and costs for the products in exchange for an opportunity for potentially greater profits?
Similarly, a licensee needs to consider the unique skills and needs of both parties in order to determine the best overall deal structure. Questions for the licensee to consider include:
- What is the best way to advance the asset while minimizing the impact on the licensor’s profits and losses?
- How does the program fit into the licensee’s existing portfolio, long-term strategy and the competitive landscape?
- Does the modality of the asset make it inherently more difficult to synthesize or manufacture?
- Is the licensee willing to co-develop, co-promote or co-commercialize the product with the licensor?
The answers to these important questions will enable the parties to choose among a wide menu of different collaboration structures. While an exclusive license may make sense for a defined asset/program, the parties also should consider whether a research collaboration, option deal, co-development or co-commercialization deal or profit share will provide the best opportunity for parties and their technology or products.
Clear Communication, Coordination And Decision-Making Authority Are Key To Successful Collaborations.
A collaboration generally includes a detailed governance structure in order to provide oversight, facilitate communication and address decision-making authority. A multi-tiered governance structure is typical, with a joint steering committee at the top that sets strategy and makes final decisions for the collaboration, and one or more lower-tier committees that communicate, plan and review the status of the collaboration in a specialized area (e.g., a joint research committee, joint development committee, joint manufacturing committee, joint commercialization committee, joint patent committee, etc.). For a licensor, these committees often provide the best path to receive real-time updates on the status of the products in the collaboration and provide an opportunity to troubleshoot and address any challenges that may arise during the collaboration. Decision-making authority may vary depending on the collaboration, where decisions may be delegated to one party or decided by an arbitrator or independent expert, or the status quo may prevail absent the parties’ mutual agreement.
Appropriate Diligence Obligations Ensure Continued Performance Under The Collaboration.
There is an inherent tension in a collaboration – each party is dependent upon the other party to perform its respective obligations under the agreement. Importantly, a licensor’s compensation is contingent upon successful development and commercialization of the product. Meaning, the licensor will not receive fair value if the licensee is not diligent.
To address this issue, collaborations generally include some type of diligence obligations to ensure that the program moves forward appropriately. The most common diligence standard is “commercially reasonable efforts (CRE),” although the specific CRE definition in any given deal is highly-negotiated. Most CRE definitions require efforts that are commensurate with those efforts for a similar product at a similar stage of development with similar market potential. Alternative compromises may include cure periods for diligence breaches, money as a surrogate for diligence (e.g., minimum payments spent on the applicable program to avoid termination), or repercussions in the form of country-by-country or product-by-product termination rights if the breach is specific to a given country or product.
It's Important To Negotiate The End Of The Collaboration At The Outset.
Although it may seem uncomfortable to anticipate the unwinding of a deal before the collaboration even begins, it is critical to negotiate the termination of the deal at the outset to enable a party to move the product forward in the case of termination. An agreement should include language detailing when a party can terminate, and the consequences associated with such termination. Reasons for termination may include termination for breach, insolvency/bankruptcy, patent challenge, cessation and even convenience. Termination consequences should address responsibility for and rights associated with licenses, exclusivity, regulatory matters, product liability, third-party agreements, manufacturing and inventory, trademarks, patent prosecution/enforcement, confidentiality, compensation and survival.
Though we’ve endeavored to set forth several issues to consider when structuring licenses and collaboration, the list above is not exhaustive. Each collaboration and license are unique, with a variety of different structures and challenges depending on the parties, the assets and the competitive landscape.