Stuart R. Gallant, MD, PhD
Licensors and Licensees
As discussed in Part 1 of this three-part series, drug development and licensing has taken on the characteristics of a soccer match with full backs (universities and startup firms developing and patenting drug concepts) passing to midfielders (startups who undertake initial drug product development and early phase clinical trials) passing to strikers (integrated pharmaceutical companies who sponsor late stage trials and commercialization). In this post, the licensing process is discussed with a focus on deal values are terms.
Understanding the Licensor and Licensees Points of View
Prior to the Bayh-Dole Act of 1980, fewer than 5% of patents resulting from federal research funding were turned into commercial products [1]. Under the act, universities were allowed to retain patent rights to inventions resulting from federal funding and engage in technology transfer, leading to commercialization. Today, most research universities have technology transfer offices which negotiate agreements on a host of inventions, including ideas which could lead to licensed pharmaceuticals.
Each technology transfer office has its own way of managing intellectual property. Some negotiate strongly to obtain the maximum return for the university. Others take a long-term view, feeling that the critical goal is for the invention to enter the market where it can provide value to society. Both viewpoints have legitimacy, and understanding this divergence in goals can be helpful in negotiating a technology transfer.
Each potential licensee enters into the negotiation in search of value, typically through sale of the drug product once it has been successfully licensed by the FDA or other regulatory agencies. At the same time, there may be unique consideration for individual potential licensees that increase the value of the patent in their eyes. Typically, the two areas that create this synergy between a particular company and a patent are: 1) technical fit—if a company already has a high degree of excellence in, for example, antibody production, then an antibody patent has special value to that company, and 2) portfolio fit—if, for example, a company already has a portfolio of cardiac drugs, then addition of another cardiac drug for a separate cardiac indication may be viewed as more valuable than a pulmonary drug which is an area outside of the company’s experience.
Diagnostics and Devices
Speaking broadly about licensing intellectual property in the healthcare space, there are two big baskets: 1) diagnostics and devices versus 2) pharmaceuticals. Diagnostics and devices are less capital intensive. Upfront licensing fees from universities typically occur in the $10,000 to $20,000 range, with royalties commonly at 2% of sale, ranging up to 4%. In these early diagnostic and device deals, the university is interested in recovering its expenditures to date on patent prosecution. The initial investors are often angels, with startup investments in the range of $3M to $5M, although larger deals have been financed through angels in the recent past. Angels seek to have as much of their capital as possible go toward advancing the project to an exit. Explaining the investors perspective can be helpful to the negotiation, encouraging the university to look toward backend royalties, rather than upfront fees.
Pharmaceuticals
Pharmaceuticals deals are a topic of intense interest in the journalistic and academic press. Some factors affect the terms of licensing in pharmaceutical deals include [2]:
- Market size: number of patients times the treatment revenue per patient
- Clinical stage: clinical attrition rates have been discussed by many authors; BIO has an excellent recent publication [3].
- Disease class (cancer, cardiac, CNS, etc.)
- Characteristics of licensor: R&D costs, sales (in the case of a pharma company)
- Characteristics of licensee: R&D costs, sales, and fit (see discussion above regarding pipeline fit)
- Technology (antibody, peptide, gene therapy, etc.)
Lee, et al. collected data on oncology and cardiac pharmaceutical deals [4]. Following analysis of Lee’s data (from Figures 16, 17, 20, and 21), box and whiskers plots may be generated for fees and royalty rate:
The fees were significantly larger for the oncology drugs (mean $96M) versus the cardiac drugs (mean $16M). However, the royalty percents were quite similar between oncology (mean 10.5%) and cardiac (mean 8.7%) drugs.
Lee’s data set shows higher average royalties, compared to Edwards data [5]:
| Group | Average Royalty (%) | Standard Deviation |
| Preclinical | 4.4 | 1.4 |
| Phase 1 | 3.1 | 1.2 |
| Phase 2 | 4.8 | 0.8 |
| Cancer | 2.9 | 1.8 |
| Cardiovascular | 3.9 | 1.4 |
| CNS | 4.0 | 1.2 |
| Cell Therapy | 3.7 | 1.6 |
| Oligonucleotides | 3.7 | 1.6 |
| Peptides | 4.5 | 0.8 |
| Antibodies | 1.7 | 1.2 |
| Overall | 4.16 | 3.37 |
Conclusions
Some general conclusions regarding this type of negotiation are:
- It is important to appreciate the goals of the counterpart negotiator. What are they looking for from the deal? Here basic questions can be helpful [6].
- Building a model of value for your side that takes into account risk will help evaluate alternative proposals [4]. However, such models are case specific, and correlations of published deal values to variables like clinical stage and disease indication are weak.
- Variables such as technical fit and portfolio fit are important to consider.
Lastly, it is important to remember that whatever deal is negotiated, your team will have to live with it. It can happen that a pharmaceutical startup must delay advancing into the next clinical Phase because of an impending milestone payment. Finances are important to any company, but it is unfortunate when finances determine the shape of the clinical program.
[1] General Accounting Office, “Technology Transfer: Administration of the Bayh-Dole Act by Research Universities.” www.gao.gov/assets/rced-98-126.pdf
[2] Lee, JH, et al. “Factors Affecting Pricing in Patent Licensing Contracts in the Biopharmaceutical Industry,” Sustainability 2018, 10, 3143; doi:10.3390/su10093143
[3] BIO, “Clinical Development Success Rates 2006-2015,” June 2016.
[4] Lee, JH, et al. “Valuations using royalty data in the life sciences area—focused on anticancer and cardiovascular therapies,” Journal of Open Innovation: Technology, Market, and Complexity (2016) 2:1
DOI 10.1186/s40852-015-0025-5
[5] Edwards, M. “Trends in University Licenses How Healthy is the Seed Corn?” (2016) bioscibd.com/university-licenses/.
[6] Voss, C. Never Split the Difference (2016).
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