Do note that it is sometimes possible that the technology developed by the university is insufficient for building the desired technological product. What you need from the university 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 be exclusive or non-exclusive. In the case of a non-exclusive licence, the university retains the right to license the same IP to others.
On a similar note, the agreement could be structured such that part of the relevant IP may be licensed to your biotech exclusively and some other parts non-exclusively. For example, a patent for a particular drug might be exclusive, while a patent for the drug delivery system might be non-exclusive.
- In which “territories” you may “use” 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 2), would be by narrowing the “territories” in which the licence applies. When the licence granted by the university is an exclusive one, the university is likely to seek exceptions so that they can continue to use the licensed IP for academic, research and educational purposes, including rights to publish research.
Two. What payments or other benefits will the university receive?
Payment terms may be structured in a number of ways.
- initial upfront payment – the university may seek a simple 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 total sum the university hopes to gain from a licensing agreement, it may serve as an important differentiating factor for a university when deciding between multiple biotechs bidding 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 university from the licensed IP. This fee acts as a disincentive for the licensee, to prevent them from “sitting on” or “hoarding” the licensed IP. One consideration is that the annual licence fee should be greater than a token sum so the licensee does not simply “shelve” the licensed IP.
- milestone payments – a university may require payments to be made as the biotech reaches certain milestones. Some examples of milestones are (1) when certain 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 main way in which the university reaps the fruits of its investment in the licensed IP. The true worth of the licensed IP will always be unclear at the outset. There may be many reasons for its value to fluctuate and many of these have nothing to do with its scientific value. A royalty agreement that increases or decreases with the level of sales of the final commercialised product allows both university and biotech to avoid a hard discussion on valuation of the licensed IP initially.
- equity issue – 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 equity 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’s perspective, it will, like all investors, want to consider carefully the arrangements surrounding their investment.1
Three. What are the development plans and milestones?
The licensing agreement may contain a provision which requires the licensee to develop products based on the licensed IP. This provision in the licensing agreement may be expressed in different ways. For example, this provision could be phrased as an obligation on the part of the licensee to use “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 effort to create a commercial product with the licensed IP and prevent the overpromising of results as success may be uncertain.
Some agreements go into greater detail by requiring licensees to follow a development plan and achieve certain milestones within a set timeframe. Some of the milestones include reaching certain phases of clinical trials and achieving the first commercial sale.2 In effect, 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 contain a clause for the parties to collaborate to resolve situations where milestones are not met. For example, a clause may provide that:
- the biotech company must give advance notice of the issues that may affect the company’s ability to meet 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 good faith.
Four. When does the agreement end and what happens upon termination?
All agreements should be clear on when they end. With licensing agreements, this is an area where a licensee might want to pay closer attention because the circumstances of termination and consequent obligations may differ.
At its simplest, there is likely to be a fixed 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 terminate the licence early. The university will want to terminate where the licensee is in breach of the agreement. This could be 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 university.
One important aspect to deal with would be the management 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 not just a right to the university’s original IP. This would allow the university to pick up 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.
On the other hand, dragged shareholders may complain that this means they potentially end up with nothing for their shares after a forced sale if the liquidation preference waterfall applies to a drag-along too.
Which of the following is provided by the licensor in a licensing?
In a typical licensing agreement, the licensor grants the licensee the right to produce and sell goods, apply a brand name or trademark, or use patented technology owned by the licensor.
What should be included in a licensing agreement?
Licensing agreements are legal contracts that are written between two parties—a licensor and licensee. The contract stipulates the type of agreement, the length of the relationship, payments and royalties that are due and when, and the extent to which licensing is allowed.
What is the role of licensor?
The party that is providing intellectual property rights to another party is called the licensor. The party that is receiving intellectual property rights from another party is called the licensee.
What is a primary benefit of a licensing agreement for the licensor?
Licensing agreements have been around since the late 1700s, when the first patents and copyrights were issued. Arrangements and licensing agreements must be mutually beneficial. The licensor provides the right to use a piece or pieces of property, and the licensee contributes its knowledge of the industry involved.
| 
