Review of Key Clauses in University/biotechnology Industry Licensing Agreements1

By Organized religion Sing and Jonathan Tan

In our previous article, we discussed the 101s of shareholders' agreements – an essential agreement when spinning out a biotech company from a university. Here, we look at another key agreement – the licensing agreement.

A licensing agreement is a contract betwixt a university that owns intellectual property (IP) and a biotech start-upward that is formed to develop products based on that IP. Without a licensing agreement, the biotech start-upwards would not exist able to commercialise and use the IP in any grade.

There are incentives for universities to enter into licensing agreements with beginning-ups. Firstly, the licensing of its IP can create boosted revenue streams for the university. Secondly, universities seek to promptly license their IP to get-go-ups with the promise that their technology can be commercialised in an appropriate time frame, as newer and improved technologies might sally and render the IP irrelevant. Thirdly, the commercialisation of IP tin can help to boost the reputation of the university, by being known to enable footing-breaking and innovative products to accomplish consumers.

In this commodity, we await at iv cardinal terms to consider if your biotech is preparing to enter into a licensing agreement with a research university.

One. What is the scope of the licence?

The scope of a licence will generally embrace the following:

• What IP is existence licensed: The licence should specify the patent and other IP that is beingness licensed. This agreement volition ordinarily refer to "Patent Rights" and "Technical Data" or "Know-how", the scope of which will be defined in the definitions section of the agreement.

Exercise note that it is sometimes possible that the engineering adult by the university is insufficient for building the desired technological product. What you need from the academy might extend beyond the patent. The non-patentable confidential information and technical know-how remain a useful part of commercialising your product and running your business.

• Is the licence exclusive: The licence given by the university may exist exclusive or non-exclusive. In the case of a not-exclusive licence, the university retains the right to license the same IP to others.

On a similar note, the agreement could exist structured such that office of the relevant IP may exist licensed to your biotech exclusively and some other parts not-exclusively. For case, a patent for a item drug might be exclusive, while a patent for the drug delivery system might be not-exclusive.

• In what "field" you may "use" the IP: The correct to utilise the IP is normally limited to specific fields; for case, the treatment of muscular dystrophy or the treatment of tummy cancer. The "Licensed Field" or "Field of Use" volition usually be defined in the definitions section.

It is important to focus on, not just the breadth of the definition, just on how that term is used throughout the licensing understanding.

• In which "territories" you may "utilise" the IP: This refers to the geographic boundaries or jurisdictions in which the IP may be used under the licensing agreement. This may be "worldwide" or limited to certain jurisdictions or other geographic boundaries.

An important way of resolving disagreements on commercial terms or upfront fees (see section ii), would be by narrowing the "territories" in which the licence applies. When the licence granted by the university is an exclusive 1, the university is likely to seek exceptions then that they can go along to use the licensed IP for academic, research and educational purposes, including rights to publish inquiry.

Two. What payments or other benefits will the university receive?

Payment terms may exist structured in a number of ways.

• initial upfront payment – the academy may seek a uncomplicated upfront payment from the licensee to recover its expenditure for its research costs. A biotech seeking to obtain the licensed IP from the university may agree to an initial upfront payment to demonstrate its interest in the licensed IP. While this payment may be a relatively small part of the full sum the university hopes to proceeds from a licensing agreement, it may serve as an important differentiating factor for a academy when deciding betwixt multiple biotechs behest for the same IP.
• annual licence fees – like the initial upfront payment, the requirement of annual payments ensures that there is a minimum revenue stream for the academy from the licensed IP. This fee acts equally a disincentive for the licensee, to prevent them from "sitting on" or "hoarding" the licensed IP. Ane consideration is that the annual licence fee should be greater than a token sum and then the licensee does not simply "shelve" the licensed IP.
• milestone payments – a academy may crave payments to be fabricated as the biotech reaches certain milestones. Some examples of milestones are (one) when sure government approvals are obtained or (2) when the biotech completes certain phases of clinical trials.
• royalty payments from sales – annual royalty payments or its variants are the primary mode in which the university reaps the fruits of its investment in the licensed IP. The true worth of the licensed IP will e'er be unclear at the outset. At that place may be many reasons for its value to fluctuate and many of these have nothing to do with its scientific value. A royalty understanding that increases or decreases with the level of sales of the final commercialised production allows both university and biotech to avoid a hard discussion on valuation of the licensed IP initially.
• equity upshot – a university may ask for equity or shares in the biotech instead of or in addition to cash payments under the options above. Like royalty payments, the value of the disinterestedness in the biotech will be dependent on the success of the commercialised product. This is akin to obtaining a share in the profits (rather than sales) of the commercialised product along with the benefits and risks of a shareholder. An issue of equity is a potentially useful option for cash-strapped biotech start-ups, although from the university'south perspective, it will, like all investors, want to consider advisedly the arrangements surrounding their investment.[1]

Three. What are the evolution plans and milestones?

The licensing understanding may incorporate a provision which requires the licensee to develop products based on the licensed IP.  This provision in the licensing understanding may be expressed in different ways. For example, this provision could be phrased equally an obligation on the part of the licensee to utilise "commercially reasonable efforts", "best efforts", "reasonable efforts", or "diligent efforts" to develop products based on the licensed IP. Whilst these expressions may sound similar, the different expressions reflect different degrees of effort which the university may require the biotech to put in to develop the product. The university and biotech may negotiate to agree to an expression that both ensures that the biotech works with sufficient endeavor to create a commercial production with the licensed IP and foreclose the overpromising of results as success may exist uncertain.

Some agreements go into greater detail by requiring licensees to follow a development plan and accomplish sure milestones inside a set timeframe. Some of the milestones include reaching certain phases of clinical trials and achieving the commencement commercial sale.[2] In result, the licensee is obliged to reach certain milestones (or at least do its best to) and honour milestone payments to the university. If the licensee is unable to meet the milestones, the licence agreement may be terminated by the university.

The agreement may also incorporate a clause for the parties to interact to resolve situations where milestones are not met. For case, a clause may provide that:

• the biotech company must give advance detect of the problems that may affect the company's ability to come across the required milestones;
• the biotech may consult with the university to come up with a plan to achieve the milestone or an amended milestone agreed to by the university; and
• the biotech and the university must work together in skillful faith.

Iv. When does the agreement cease and what happens upon termination?

All agreements should be clear on when they cease. With licensing agreements, this is an area where a licensee might desire to pay closer attention considering the circumstances of termination and consequent obligations may differ.

At its simplest, there is likely to exist a stock-still date. The length of the agreement could either be an agreed period from the date of the agreement or on the expiration of the last patent related to the licensed IP.

There are likely to be provisions allowing the parties to finish the licence early. The university will desire to terminate where the licensee is in breach of the agreement. This could exist the case when a licensee has failed to develop the licensed IP or if the licensee is in financial strife. Similarly, the licensee would not want to continue making licence payments if the university is in breach, although oftentimes, there are few obligations on the academy.

One of import aspect to deal with would be the direction of relevant IP when the licensing agreement is terminated early. The university might want a right to the new IP developed by the licensee and non just a correct to the academy'due south original IP. This would allow the university to pick upwards where the biotech has left off and continue developing the product. In this case, the biotech may want a degree of compensation for use of its developed IP.

The agreement may also provide for the post-obit rights upon termination:

• The licensee may have the right to dispose of its stocks of products based on the licensed IP.
• The academy may require cooperation from the licensee for an interim menstruum, allowing the university to continue development or sales after termination.

Conclusion

The four key terms discussed in this commodity are merely a subset of of import terms in a licensing agreement. At that place are many more terms worthy of a word in bang-up depth due to the complication of this topic. We have barely scratched the surface regarding the nuances in the ways the terms above, and other terms found in licensing agreements work. These can vary and be drafted to deal with both jurisdictional differences and different commercial positions.

Further reading

You may wish to read up on the 101s of shareholders' agreements as well. The shareholders' agreement is a key agreement you may desire to put in identify in parallel with establishing a new company.

Shareholders' agreements can contain reasonably circuitous concepts that you may want to review a few times. They are not always accessible, perchance because business and shareholder relationships are not always straightforward.

Read more than on shareholders' agreements (SHA):

• board and shareholder control provisions – 3 fundamental command concepts for a SHA
• transfer of shares provisions – 5 key concepts on transferring shares under a SHA
• board control provisions – v key options for board provisions in a SHA
• pre-emptives on transfers – five key options for pre-emptives on transfers in a SHA
• elevate forth rights – five key points on drag-forth rights in a SHA
• reserved matters – 5 key considerations for a reserved matters list in a SHA

Sign up to receive updates on our Wednesday Driblet-In sessions where we hash out shareholders' agreements over video-conference – http://eepurl.com/hzDzU5. Founders, venture uppercase funds, angel investors, family offices and commercialization professionals all welcome!

[1] See for example our article on the 101s of shareholders' agreements. Yous may too refer to the section below on "Further reading".

[2] Notation that this interacts with the concept of "milestone payments" discussed above and termination beneath.

Biotech Connection Singapore (BCS) is part of an international network of not-profit organizations, that aims to promote the transfer of ideas from theory to real world applications past providing a platform for fostering interaction between academia, industry and businesses.

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Source: https://www.biotechconnection-sg.org/four-key-terms-in-a-licensing-agreement/

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