6) Inadequate termination rights. License agreements are formed and terminated every year. While every contract is drafted when the parties expect success,
be certain to negotiate a reciprocal right to terminate under certain adverse conditions, including conditions of significant
underperformance. It is also best to regain all of the rights owned prior to the agreement, such as ownership of the IP, upon
termination of the license. Additionally, the effort and thought spent structuring the agreement to ensure that regulatory
approvals and clinical data are available following termination will be richly rewarded by keeping the commercialization timeline
as close to on track as possible.
7) Assigning versus licensing intellectual property. A license agreement has special protection in bankruptcy court that exists to ensure that any royalties due under the agreement
be paid. Therefore if a licensee goes bankrupt, and the product or technology ends up in the hands of a new owner during the
bankruptcy process, the rights to receive royalties and enforce the agreement maintain their value with the new licensee.
If a licensor sells or assigns the IP, rather than licensing it, a bankruptcy trustee is free and clear to sell it in bankruptcy
for the benefit of creditors, and the economic value is lost. Use a license agreement to transfer IP rights whenever possible,
and especially whenever a material part of the value rests in downstream economic rights.
8) Combining a supply agreement with a license agreement. Combining these agreements can actually devalue a license. It also creates complexity once the product is commercialized.
If the licensor decides to monetize the license, the potential acquirer could be subject to a tax liability in that the sale
could be characterized as other income rather than as an asset purchase or a financing. This characterization creates incremental
tax liability for some acquirers and would therefore reduce the value for them. Keep these agreements separate if possible.
9) No contingent valuation clause. Suboptimal circumstances arise that can impact the royalty rate of a license. Many of these circumstances can reduce the
value, but do not eliminate the value of the license entirely. In these cases it is appropriate to have a stepped-down royalty
rate rather than a complete termination of royalties due. One example of this may be to have a royalty step-down upon generic
entry, or to leave a royalty rate in place upon generic entry as long as net sales remain above a certain threshold. Many
licenses still hold significant value even after adverse events. That should be anticipated and provided for in the agreement—not
after the event has taken place or during renegotiation.
10) Not defining comprehensive reversion rights. Licensees will commonly make improvements to a product during the development stage. But if a license doesn't adequately
cover the rights to improvements, it could limit how the licensor uses its own underlying technology. This is a significant
issue with platform technologies today. Work to ensure the freedom to exploit the IP outside of the field of use regardless
of improvements made by the licensee within the field.
Licensing is critical to product development, but many agreements are developed years before a product ever reaches the market.
The baseline economic terms are important in terms of measuring and realizing the value of IP, but it is in negotiating the
numerous key terms of the agreement that the full range of value, such as the "know-how" value of the IP, can be exploited.
Experience has shown that clarity and attention to licensing terms will ease the due diligence process and simplify future
transactions but, most importantly, also preserve the intended value of the deal in the myriad circumstances that will inevitably
occur following the execution of the agreement. The time to optimize a license agreement is prior to signing, when the only
certainty is the inability to predict the future. Attention to these key terms will reduce restrictions on the ability to
respond to adverse situations, and will help a licensor better navigate the uncharted waters ahead.
Todd C. Davis is managing director at Cowen Healthcare Royalty Partners. He can be reached at firstname.lastname@example.org