Pharma Licensing: the why the how and a few things to get right
Platform or asset licensing has increasingly been utilised across the bio-pharmaceutical industry to achieve Corporate objectives by sharing intellectual property (IP). IP includes patents and know-how and third-party proprietary technologies, compounds and products, and can be used to build on existing therapeutic areas, expand into different geographies or to diversify portfolios.
A pharma licensing deal is effectively a collaboration where IP is shared and the contractual arrangement between the licensee and licensor reflects both the intrinsic value in the IP, in addition to recognition that the licensee will need to further invest in research and development (R&D) and commercialisation costs before both parties can share in any future benefits.
Key questions before a licensee will engage in a process
The key areas of focus when a Company considers an in-licensing opportunity are threefold: does the asset satisfy a high unmet need, what level of market exclusivity does it realise, and is there a differentiated efficacy over the current standard of care (SOC). There can be other considerations such as the licensee’s ability to leverage synergies, either through existing infrastructure e.g. R&D, supply chain, commercialisation capabilities etc., or if they have a complementary expertise which can be utilised to expedite a product to market in both time and the probability of success. As a result of this strong focus on these key considerations, licensees usually expect to start detailed due diligence much earlier than in a straightforward divestment or M&A process. Once it is determined that an asset or platform ticks all or most of these boxes, then it is game-on, and a non-binding offer is likely to be submitted.
During negotiations, a key challenge for any licensing transaction is the aligning of expectations of the value split between licensee and licensor i.e. what percentage of the total deal value does a licensor realise through deal payments, versus what a licensee retains through future profits. In a licensing transaction both parties collaborate to realise value over potentially many years, so the value at the point of the transaction as well as the evolution of the respective contributions and arising benefits to each party needs to be determined, agreed, and codified at the onset. The result of having to make such a determination and obtain both parties agreement, at potentially a very early stage of an assets lifecycle, can mean that licensing structures and agreements can be very complicated.
Whilst both parties tend to directionally agree on the importance of the asset and the overall commercial opportunity, there is, more often than not, a discrepancy in the perception as to where an asset sits along its development pathway or where it stands in its lifecycle, with licensors having a much more optimistic perception of the development status than a licensee. This can lead to tension, as the stage of development of the asset or remaining market exclusivity, strongly influences the value a licensor can realise in the near-term.
Early-stage assets and especially those with novel modalities or mode of action (MoA), regularly generate a lot of excitement in the market. However, whilst a licensee does see the future benefit of acquiring such an asset, this “novelty” comes with a lot of risk, and upfront and near-term financial terms usually reflect this uncertainty – rather than scientific excitement – with the bulk of the reward to a licensor being attributed at a later stage through development and commercialisation milestones. This situation is usually contradictory to a licensor’s expectations, as they believe that they should be rewarded for their innovation with a big value upfront and near-term milestones, whist also ascribing a higher premium for their novel asset, compared to those values achieved for established MoA’s.
The key inflection point, where a licensee is more willing to pay higher up-fronts or early-stage milestones is once proof of concept (PoC) has been demonstrated, either through a Phase 2 clinical trial or possibly earlier when looking at certain cancers or rare disease assets, given the limited number of therapies with significant efficacy in these fields.
Insight into the Due Diligence process
Unlike in a M&A transaction, where a company acquires multiple products, people and infrastructures, the licensing of a single asset or early-stage platform technology is much more transparent to third parties and a Licensee will be judged on their ability to accurately assess the opportunity. The consequence of this visibility to Investors, Board of Directors and even peers, is that before a Licensee commits to deal terms, they will take a much deeper dive in due diligence and, not just by looking at the data provided, but also by taking a critical look at the expertise and knowledge of the Licensor’s employees. If any data is ambiguous or not presented clearly, this is a red flag to a potential Licensee, so they will dig deeper and keep on digging until they either get a satisfactory answer or prove that the Licensor has spun the data in a more positive light. If, after undertaking such an investigation, the Licensee still wants to license the asset, a Licensor can expect to see an adjustment to the deal terms, in overall value, timing of milestones or both, as the Licensee starts to get nervous about what they might have missed.
The best way to avoid this uncertainty, is for the Licensor to prepare a clear Information Memorandum which is supported by a robust and well-structured Virtual Data Room. The Licensors internal experts should be available for Q&A sessions, with questions or topics being submitted by a potential Licensee at least 48 hours in advance of the expert Q&A session to allow data to be gathered and well presented.
Build a relationship based on trust
When going on a journey to licence an asset or portfolio there is a lot to take in, but the biggest advice I could give to any Licensor or Licensee, is that before either party walks into a licensing opportunity, they both need to recognise that once the asset is licenced, a partnership is created, and that this partnership needs to be built on trust and must feel to be balanced for both parties right from the start. The Licensor has the knowledge and has invested time and money in creating the IP for the asset, but Licensee will be responsible for bringing the product to market and, to do this, will need to invest a significant amount of money and time before getting their reward. Ensuring alignment of knowledge at an early stage is critical to the success of the asset or platform and, to the financial and mental wellbeing of both parties.
CG Results Healthcare has recently advised Servier on the out-licensing of the global rights to the Sym022 programme, an anti-LAG3 monoclonal antibody.
Our specialist healthcare team, with backgrounds in the life sciences, understand the complexities of valuations and deal structures that are unique to licensing deals in pharma and biotech and are with our clients every step of the way.