Seeing the Fire Behind the Smoke - Pharmaceutical Executive


Seeing the Fire Behind the Smoke

Pharmaceutical Executive

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


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