This paper provides practical guidance on the steps to take to successfully execute a licensing agreement. It is written from the perspective of both the licensee and the licensor, as each party has multiple and different hurdles to overcome.
Search and Evaluation
The first step is to identify the proper opportunity. The potential licensee should have key criteria in mind for this. At AstraZeneca, after checking off the ‘strategic fit’ box, which should be the first test, a proven approach is to look for the ‘5 Rights’. A product needs to do the following:
- Act on the right (and defined) target, i.e. the mechanism of action should be clear;
- Show bioavailability in the right tissue and the right drug-on-drug interaction;
- Allow the right assessment of risk-benefit (predictive biomarkers do help);
- Show scientific evidence in the right patient population; and
- Have the right commercial characteristics: differentiated value proposition vs. future standard of care, attracting payer and provider focus and thus providing market access.
Thorough due diligence will reveal which of the above criteria are met by the opportunity. A licensor should not hide weaknesses of the product or try to explain them away during this process, instead issues need to be addressed head-on and mitigations proposed.
There is no such thing as a flawless product, and any licensor that actively addresses any shortcomings will be seen as a more credible partner.
If a licensor has the luxury of choosing between multiple possible licensees, a matrix assigning appropriate weighting to the licensees’ capabilities in relevant areas such as R&D skills, commercialization capabilities, financial clout, etc., multiplied with a score against these criteria, will quickly show which potential licensees to prioritize.
Capability Presentation
Capability presentations are a common way to ‘pitch’ the product or technology and will often separate great opportunities from poor ones in the eyes of the licensee.
Key “do’s” include; great materials, energetic presenters, a smart balance of senior leaders and passionate subject matter experts, a convincing, well-rehearsed story that leaves nothing to chance (including the technology – bring hard copies!) If marketing skills are in demand, an energetic mockup of a marketing presentation as opposed to a bland description could swing the vote.
The “don’ts” are perhaps obvious, but worth re-stating; do not be late with the pre-read, lack emotional connection with the potential licensee’s brand, lack attention to detail or make a poor-quality presentation that leaves strategic questions unanswered. This is the one chance the licensor team has to leave the right impression.
Negotiations
When negotiations are underway, the Number One task is to establish a trusting relationship with the counterparty. This includes keeping commitments to timelines and points previously conceded - there can be no backtracking! If issues are interdependent, make that clear upfront and state which concessions on your side depend on which ones on theirs. Be upfront with issues, try to solve the easy ones first and put complicated ones on the shelf and revisit later. Don’t try to score quick negotiation gains at the expense of reputation and trust. After all, the deal has to live after the ink has dried on the signature pages.
There are a number of specific points that need to be considered during negotiations.
Clarity on the deal structure should be gained early, including upfront, milestones, sales-related payments, royalties etc. A buyer should pay aggressively for the right asset(s) as quality assets are rare and currently it is a seller’s market.
It is important to consider the money at risk, i.e. the amount that is committed and would be lost if no revenues came from the asset in question. Sometimes this can be managed through contingent value rights, frequently found in acquisitions, where a portion of the otherwise upfront consideration is paid only on achieving certain sales or another milestone.
Specific attention needs to be paid to profit and loss (P&L) considerations. Contrary to prevailing opinion, pharma does not have unlimited funds. The right accounting structure can allow the licensee to undertake R&D activity for example, and be paid for it without this counting as a P&L hit. It involves ceding control on decision making and risk-taking on the part of the licensor, but could allow the deal to proceed even if initially “no money was available”.
Another important consideration is the technical concept of a ‘partnership’. A European company typically only pays European taxes on their European revenues and US taxes on their US revenues. However, in an agreement deemed by the IRS to be a partnership with a US-based company, the European company could find that its worldwide revenues are subject to US taxes. Careful structuring of the deal and wording of relevant provisions can safeguard against this.
When determining the right amount to pay for an asset and at what stage of development, you can be guided by how much of the total net present value (NPV) should go to each company. The appropriate share should be based on the stage of the asset upon licensing; how much has the licensor already done and how much will the licensee contribute to the value created? Based on these principles, a total NPV of the opportunity can be constructed and a fair arrangement of value share can be arrived at through the appropriate distribution of upfront, milestones, royalties etc.
Non-financial considerations in the contract often are an afterthought, but they are key to success. For governance considerations, the incoming alliance management team, which will manage the deal down the road, should be involved early, so that a workable governance framework can be integrated into the contract. Other aspects like performance obligations, continued supply, intellectual property (who pays for prosecution, litigation etc.) and termination provisions should be thought about carefully, as should change of control scenarios and transitional help for the licensee until it can run the ship on its own.
Human Resources (HR) Considerations
For acquisitions in particular (be it an asset acquisition or a business/company acquisition), HR considerations play an important role. It is advisable to retain the services of an attorney that is well versed in labor law.
The first consideration here is the scope of a possible people transfer to the buyer. In many cases the buyer will insist on this to take advantage of product-specific knowledge, and the seller will be happy to find a new home for those employees that may otherwise not be redeployed easily. As an example, the scope of any people transfer could be defined as covering those who have spent more than 50% of their time on the transferred business or asset. The timing of any transfer will preferably be at closing of the agreement and not phased if an asset transfers gradually. In the latter case, necessary work by people who have already transferred to the buyer organization could be done under a service agreement.
There is a distinction between automatic transfer and ‘offer and acceptance’, where the buyer will have to make an offer and employees have to accept in order to become part of the new organization. Legislation varies by country. Generally, if a business transfer is done via share purchase, automatic transfer is the norm.
Conditions appropriate for the transferred employees include a substantially similar salary, cash incentives and benefits in aggregate (while being fair and reasonable in relation to existing employees in the buyer company). You should determine upfront who pays for bonuses, commissions and other performance payments pre- and post-closing, as well as who covers pension liabilities, relocation terms (the better of the two companies’ schemes) and cost associated with any employee’s decision to decline relocation.
Retaining talent is another important consideration. Existing equity schemes might call for single-trigger vesting, meaning that the sale alone entitles the employee to a payout, or double-trigger, which means that in order for the employee to get a payout the business must be acquired and they also lose their job as a result. This needs to be considered by the buyer upfront, as these costs could be substantial and a surprise if not clear in advance. The acquirer should also try to ensure that earn-out schemes, which give employees a payout on achievement of specific milestones, are included in milestones paid to the business following the acquisition. Overall, however, the buyer should always be aware of potential conflicts over earn-out distribution schemes, as they may incentivize the incoming employees in a way that is not aligned with the strategic needs of the business.
A final consideration when employee transfer is involved: try to be a good seller. Be fair in identifying ‘in scope’ employees, provide employee information to the buyer at the right time and initiate communication with affected staff at the right time (doing it too early can cause uncertainty and too late will leave employees feeling disrespected). Do also ensure you retain the right employees to support the transition and/or long-term services if appropriate.
Anti-Trust Filing
One important consideration that needs to be looked at before a deal can close is whether the competition authorities have to be alerted, so they can decide whether or not to impose restrictions (such as the requirement to sell off specific assets before the deal can close, or to deny the deal altogether for competitive reasons). Such filings have to be done in several countries, including the US, Germany, Brazil and others.
For the US, a Hart Scott Rodino (HSR) filing is required if:
- the transaction affects US commerce; and
- 1) the value of acquired assets or equity is > $80.8m and annual sales or total assets of the acquired/acquiring person are > $161.5m/$16.2m; or
- 2) the value of the acquired assets/equity is > $ 323mi.
Required documentation for an HSR filing includes all analyses, reports, emails etc. prepared for or by officers and directors of any entity controlled by the acquiring and acquired person for the purpose of evaluating the acquisition. The review normally takes 30 days but can be quicker or require more time. Businesses may not be integrated until HSR clearance is obtained. Planning for post-closing integration is acceptable, but to the buyer cannot exercise control over the business being acquired. Excessive coordination of the businesses to integrate infrastructure or personnel and sharing of competitively sensitive information is also forbidden, as is negotiation with the acquiree’s suppliers, CROs or other third parties.
Conclusion
- In summary, if these points are followed, a successful deal can be done that creates significant value for both parties:
- Select the right product
- Select the right partner
- Focus on capabilities
- Design the optimal deal structure
- Be upfront on any issues
- Negotiate with respect and commitment
- Be creative to find alternative solutions if needed
- Employees created the value – treat them fairly
i Based on 2017 figures