The Offensive and Defensive Way of Pharmaceutical Licensing Transactions

Text by Yin Gang

This year's cross-border M&A transactions have been greatly reduced due to the impact of the epidemic, but the pharmaceutical licensing transactions (License-in, License-out) still maintain a sustained high growth rate, especially the cross-border License-in transactions.

In 2021 alone, the number of license-in transactions of Chinese pharmaceutical companies will reach more than 130

The continuous growth of the number of transactions and the increasing amount of individual transactions shows that everyone widely recognizes the role of this licensing transaction model on the development of pharmaceutical companies

The quantity of the underlying products on the market is not under the control of the transaction parties.

In general, in a licensing transaction, the licensor and the licensee have many common interests, which is the basis of a pharmaceutical licensing transaction, and it is also the reason why such transactions continue to be hot

Transaction Structure Design

The transaction structure design is the most important factor in determining whether a licensing transaction can be concluded and the distribution of interests between the licensor and the licensee

1.

In this mode, the rights and obligations of both parties are reflected in the licensing transaction agreement, so the licensee needs to strive for contract terms that are beneficial to itself as much as possible

2.

For the licensee, most of its interests will be realized through the agreement in the shareholder agreement or the joint venture agreement with the licensor, especially if the licensor or the licensee has subsequent capital market operations, the licensee The value-added part of the equity will become an important way to realize its commercial interests.

3.

Because the licensor can not only obtain the license fee according to the agreement of the licensing transaction agreement, but also enjoy the equity appreciation of the joint venture company, especially the equity appreciation part of the potential joint venture company after it is listed on the capital market

Attribution of core assets

In addition to the issue of transaction structure, another focal issue that licensors and licensees pay attention to is the attribution of core assets

1) The ownership of the rights of the target product itself is mainly reflected in the profit return generated by the successful commercialization of the target product.
The ownership of this part will be distributed in the license agreement in the form of the licensee paying the license fee to the licensor.
The shares allocated by the licensor and the licensee after the commercialization of the target product is intuitively expressed as the proportion of the license fee to the total profit (or sales) of the target product after successful commercialization in the future
.

The determination of the amount of the license fee depends on many factors, such as the scarcity of the target product, the possible sales expectations of the target product after it is launched, and the comprehensive strength and negotiation ability of the licensor and the licensee
.
In general, the licensee will try to reduce the proportion of the down payment as much as possible, and pay more license fees in the form of sales commissions, which can share the risk of drug research and development with the licensor
.
In addition, for some matters related to the licensor or the subject product that may affect the commercial performance of the subject product, it can be used as a factor to deduct the license fee, such as the above-mentioned defects in the licensor's intellectual property rights, the successful business of the license subject.
The additional costs incurred by the authorization of a third party that may need to be obtained for the transformation, the loss caused to the licensee by the licensor's breach of the stated warranty,
etc.

2) The ownership of intellectual property rights related to the target product
.
The intellectual property here refers specifically to the new intellectual property related to the target product generated by both parties in the process of research and development of the target product, that is, the so-called prospect intellectual property
.
Because the intellectual property rights of the target product will not only affect the target product itself, but also the parties to the transaction may use these intellectual property rights in the research and development of other products
.
Furthermore, both the licensor and the licensee will contribute to the generation of these intellectual property rights, and both parties have reasons to request that these intellectual property rights be attributed to their own names
.
Therefore, it is often seen that the two parties in the licensing transaction will have more conflicts of interest regarding the ownership of intellectual property rights
.

From another perspective, it is precisely because of the importance of these intellectual property rights that after many transactions, both parties have gradually explored several mature solutions to this problem
.
For the licensee, the first choice is of course to claim that these intellectual property rights belong to them, because in a conventional licensing transaction, the licensee will assume the main responsibility for the further research and development of the subject product in the licensed area, and then The licensee can claim that the intellectual property rights arising from these R&D activities should also belong to it
.
Of course, the licensor will raise objections on the grounds that the emergence of these intellectual property rights is derived from the previous intellectual property rights or basic data of the licensor.
Without these background intellectual property rights or basic data of the licensor, it is impossible to generate these new intellectual property rights.
intellectual property
.

Judging from practical experience and recent transaction cases, when the licensee leads or substantially participates in the further development of the target product, it will be more difficult to attribute these prospective intellectual property rights of the target product to any party
.
There are two common approaches: one is to simply attribute these future intellectual property rights to both parties, and either party has the right to use it alone without paying any fees to the other party.
If the licensor or licensee needs to When the prospect intellectual property is authorized to be used by a third party, the license is approved by the other party, and the license fee collected needs to be allocated to the other party according to a certain percentage
.
The other is to classify intellectual property rights according to types such as products, methods or processes, or according to geographical scope, and attribute the prospective intellectual property rights in different pairs or different regions to different parties, but guarantee that the other party enjoys free right of long-term use
.

R&D, production and commercialization arrangements

The pharmaceutical licensing transaction is very different from the general licensing transaction.
What is different from the general licensing transaction is that the pharmaceutical licensing transaction is not simply licensing the licensor's intellectual property or know-how to the licensee for use.
Then a license fee is charged
.
A pharmaceutical licensing transaction is a multi-task and long-term transaction.
A successful pharmaceutical licensing transaction requires the licensor and the licensee to conduct close and long-term cooperation in the pharmaceutical research and development, production and commercialization stages
.
This requires the licensor and the licensee to clearly agree on their respective rights and obligations at all stages of research and development, production and commercialization in the pharmaceutical licensing agreement
.

1) Pharmaceutical research and development stage
.
Under normal circumstances, the licensee bears the main responsibility for the research and development activities in the licensed area, but the licensee may also require the licensor to provide certain personnel and technical support
.
Especially in the technical, material and data transfer stage, the personnel and technical support of the licensor are essential
.
During the research and development process, since the licensor has a better understanding of the characteristics of the target product, the licensee may also try to require the licensor to continue to provide personnel and technical support, but at this time, the licensor may ask the licensee to provide information on its personnel and technology.
As a negotiating tactic, the licensee can claim that this part of the fee has been included in the license fee or make a certain deduction from the license fee
.

2) Pharmaceutical production stage
.
The supply of experimental drugs will generally continue to be the responsibility of the licensor
.
For the production of the commercialization stage after the drug is approved, if the licensee has a considerable drug production site and capacity, and the commercialization profit generated by the license area obtained by the licensee may account for the entire global commercial profit of the target product In the vast majority of cases, the licensee may attempt to claim the lead in the commercial production of the drug
.
Second, if the licensee cannot obtain the right to produce commercialized drugs, the licensee needs to determine the pricing mechanism for drug supply in the drug licensing agreement, generally adding a certain profit ratio on the basis of drug production costs.

.

3) Drug commercialization stage
.
In this part, the core concerns of the licensor and the licensee are mainly the attribution of the trademark in the commercialization of the subject product and the determination of the sales commission in the license fee
.
The licensor generally insists that the trademark of the subject product and the value-added of the goodwill generated on the trademark be owned by it, and the licensee may request some reduction in the license fee
.
In addition, the licensee needs to accurately define the scope of "sales" and the determination of "sales" when determining the calculation method of sales commission.
For example, "sales" should be limited to commercial sales to third parties; "sales" Should refer to net sales only, which should be net of taxes, sales discounts, incidentals,
etc.

In a word, as the target product becomes more and more scarce and the licensee faces more and more competition in the license-in transaction, learn more about the interests and concerns of the licensor and the licensee that are common in the pharmaceutical licensing transaction.
possible solutions
.
Especially for the licensor's possible interest demands, if the licensee can prepare in advance, it will undoubtedly play a huge role in facilitating the final conclusion of a pharmaceutical licensing transaction
.

references:

1.
"2021 Inventory: Top Ten License-in Transactions of Innovative Drugs"

2.
"License in/out of pharmaceutical companies, the unity of opposites between industry and capital"

3.
"From License out to mutual shareholding, this pharmaceutical company quickly established an overseas base! Analysis of Baiji, Tianjing, Jiakesi, Qilu International Exploration"