There are a number of reasons why a company may find it advantageous or necessary to in-license a product or technology. Firstly, it allows a business to quickly expand its portfolio of potential candidates without the risks and costs involved with substantial R&D. Secondly, it helps to expand a business by acquiring technologies that are complementary to those developed in-house. And thirdly, in-licensing enables a company to obtain rights in platform technologies to assist in internal R&D activities. It may be necessary to obtain a license to avoid an infringement action by a third party.
Technology in-licensing can result in a successful arrangement for the involved parties to create a win-win situation. However, a number of questions must be answered before a successful agreement is executed. Licensees (the IP or the technology recipient) and licensors (the IP owner or the technology provider) must have a clear understanding of how the technology will be used, the risks associated with its development as well as how the finances of the deal will come through to fruition.
Once due diligence has been completed and an understanding of deal terms has been reached, licensees and licensors can move forward with crafting an agreement that provides opportunities for each party that would not have been possible without the other. Thorough due diligence for in-licensing transactions will involve technology, legal and business aspects of the arrangement.
Prior to in-depth discussion of business terms and arrangements, it is important to know much about the technology being licensed. Thorough technology due diligence will uncover answers to a multitude of questions relating to the particular technology being in-licensed.
Understanding the IP landscape early in the in-licensing process is important in negotiating a successful deal. Reviewing the licensor’s patents and patent applications is essential to determine what they constitute, whether a licence is really needed and whether the licensor will be able to effectively to stop others from competing with the licensee. While a licensor may have a significant portfolio of IP in a particular field, the licensee may not require access to all of it. A thorough analysis of the IP rights on offer should be conducted and those that the licensee needs to have access must be determined. Further, a decision must be made to assess whether an exclusive or nonexclusive licence is needed to make the relationship successful. While an exclusive licence can help to protect the in-licensor in the marketplace for its products, it is generally more expensive to obtain and can be difficult to keep. While understanding what IP rights can be obtained from the licensor is important, it is equally important to be aware of rights held by third parties in the field of the technology. Due diligence should determine whether another company holds patents that block the use of the technology that the licensee intends to in-license. An oversight in this regard could result in licensee’s inability to use the technology.
Once the technology and IP landscapes are assessed, other risks in commercialising the technology must be identified. Understanding all of these risks is necessary in developing a business plan for use of the in-licensed technology. At this stage, the negotiations can often get difficult. As a general rule, greater risk to the licensee of failure in the licensing transaction should lead to a lower royalty on the improved product. A number of factors are considered under risk, such as how much money the licensee will have to invest to commercialise the product, how many competitors already exist in the field, demand for the improved product and whether regulatory approvals are required. If the licensor or other licensees have already crossed most of these hurdles, then the royalty can be higher.
Typical licensing structures may include terms for:
- Upfront payment when the licence is signed
- Milestone payments such as payments upon achieving financing for the company based on the in-licensed technology, upon the product receiving regulatory approval etc
- Royalty payments on sales of the products
- Technical assistance fees
- Trademark usage fees
Typically, both parties will want a means to exit the licence agreement gracefully if the commercialisation does not go as planned or in the event of a sale or overall failure of the business. The licensee will particularly want an exit strategy if it cannot get the licensed technology to work with its products or if changes in the market make the product unsellable. In the case of medical devices or other products requiring regulatory approval prior to sale, failure to obtain regulatory approval should also allow for the licensee to exit the deal. Deal documentation should lay out the terms for scenarios such as these and any others that could occur.
In conclusion, technology in-licensing can be an effective way to make new products or improve existing ones while reducing associated cost and risk. However, success in such arrangements depends on having a process that leads to a thorough understanding of the technology involved along with the business and IP landscapes.