Report Sheds Light on Importance of Licensing Agreements in Biopharma Industry

Published: Sep 13, 2018 By

File folder with word Licenses

In many ways, licensing deals have become part of the lifeblood of the biopharma industry. Companies regularly sign new licensing deals in hopes of developing a therapeutic that will benefit patients and become a primary revenue driver.

These kinds of deals provide a pathway for small startups or universities to harness the research and development power of larger companies. Likewise, the deals allow companies to pass along programs that are not a core focus to another company that specializes in that type of development – all while keeping a financial attachment to the asset. Just how prevalent is the use of licensing agreements? According to a new report released by the global consulting firm Charles River Associates (CRA), approximately 75 percent of all new biologics and small molecules launched in the United States were not discovered by the company or entity that commercialized the product. Sean Sheridan, a principal in the intellectual property practice at CRA and author of the study, said that statistic highlights the importance of licensing agreements for the industry. One of the primary users of licensing deals is research universities that discover key molecules and then license them out for development. The CRA report examined 50 different license agreements between universities and preclinical and discovery stage life science companies.

But, the report also highlights how complex the licensing deals can be, particularly given the uncertainty and inherent risks of a developmental path. Speaking to BioSpace in an exclusive interview, Sheridan called the developmental path a “big unknown,” given that between the time a patent is filed on a potential molecule or therapy and it goes to a regulatory agency, more than 10 years will have passed.

“There are a lot of uncertainties. You don’t know what the product will be, what indication it will be treating, what other types of technology might be needed to assist with the product and what entity will wind up commercializing the product,” Sheridan said.

Early-stage medicines have a potential to generate millions of dollars for those companies that commercialize them, but the unknown risks call for the right deal structure. If the risks aren’t factored into a deal, it can jeopardize the future of early-stage companies or research institutions. Because of the unknowns that can happen over that 10 year or more period, Sheridan said the licensing agreements have to be flexible enough to protect all the parties. Licensing deals now have to include multiple product provisions such as royalty “stacking" and sublicense payment structures. The CRA analysis shows that combination product and royalty stacking provisions “address the potential need of licensees to include other technologies when developing a new product based on early-stage technology.”

The CRA analysis shows that university researchers who license out products typically share in the value created through sublicensing. That sharing comes from values derived from royalties on sales or other types of payments. When it comes to sublicensing, the CRA report notes that because of the long developmental time before commercialization, “non-royalty sublicensing payments are often an important source of revenue for licensees.” Most of those types of agreements utilize a royalty pass-through, according to the report.

Sheridan said CRA wanted to use the report to provide a level of understanding for those entities who might enter into a licensing negotiation so they will have an understanding of industry norms and know how their interests can be protected.

“The structuring of an agreement is critical. Whether you’re the licensor or licensee, you want to know what structure is most critical for your needs,” Sheridan said.

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