Partnering, licensing and collaborations - issues and trends

Current dealmaking trends

For major corporates, refreshing the pipeline of products in development and accessing new technologies remain important drivers. For smaller innovators, a licensing deal can mean gaining a timely injection of cash in a constrained funding market. These are familiar themes, but we are observing greater complexity in several areas of dealmaking.

Gaining access to hot technologies, such as cell and gene therapies and AI, is a notable area of focus. While innovations like these can transform the level of innovation in an established business, working in partnership may present its own challenges. The approach taken by an AI developer to product development, for example, can be more fluid than that in a larger life sciences corporate. Bringing in new technologies can also mean that the intellectual property (IP) mix is different, with a greater emphasis on softer IP rights (eg in data and software) rather than the more typical emphasis on a patent portfolio. It also becomes more difficult to predict what kinds of assets might result from a project and this can require some “crystal ball gazing”.

We are also seeing increased levels of innovation in the supply chain itself, involving contract development and manufacturing organisations (CDMOs) in the product development process, for example.

Deal complexity

A major current theme is complexity, with framework deals across multiple different assets and programmes, and hybrid models with asset purchases alongside licensing activity. Multiple asset deals may involve different kinds of IP being generated and formulating an appropriate construct is challenging. Patents may cross between different product assets, and may then need to be separated. A key challenge for those tailoring the transaction, therefore, is to develop a model that will provide the best fit for the deal and which is flexible enough to cover off issues that may arise and which facilitates collaboration between partners.

Financial structures

The theme of greater complexity is also borne out in relation to payment structures, with tailored upfront and milestone payments, and royalties, to meet the particular needs of the deal partners. A smaller biotech, for example, may wish to sacrifice part of a future royalty stream in favour of upfront payments. Payment structures also need to reflect the likely IP mix appropriately.

Standard royalty reductions are often negotiated, such as loss of patent or launch of a generic drug. Newer triggers for royalty reduction are being requested, such as the impact of new legislation like the US Inflation Reduction Act. These can be countered by protective measures such as a restriction on royalties dropping below a defined level.

A common licensor risk is in relation to “reach through” (ie ensuring that what is developed using the licensor’s technology triggers milestone and royalty payments). Careful drafting is required.

Standards of diligence

This area is receiving a great deal of attention with lengthy drafting often being used and disputes where one partner considers that the other is falling short. This merits consideration at the outset to ensure that the obligation is relevant to the partners and that the level of diligence is well understood, and there is some clarity as to what will be enough to trigger action under the contract.

Regulatory compliance

As regulation evolves and responds to innovation, achieving compliance becomes more challenging. The EU AI Act, for example, will impose risk assessment and compliance obligations on many different kinds of businesses. We see regulatory compliance being built into deal structures, so that assistance and support can be called upon from the innovator when necessary to meet these obligations.

Anticipating and managing conflict

While most partnerships progress well, we are seeing areas of conflict particularly around “commercially reasonable efforts” obligations, and financial structures. The broad message is to understand these trends and head them off at the drafting stages of the transaction. Bottoming out the issues at the drafting stage when parties are in cooperative mode is preferable than leaving it to a later stage when areas of conflict might have emerged.

Likewise, revisiting the terms of the arrangement as it progresses can help to address potential disputes before they emerge. For longer term deals, setting up the right governance structure helps to prevent deadlock issues, allows partners to flex their agreement in response to evolving challenges and can help to foster collaboration and joint working between the parties. 

If termination of the contract becomes an option, a party needs to be very careful to get it right. A failed attempt can be turned around on the terminating party, with potentially costly consequences.

Allowing for arbitration instead of resorting to court action has advantages in terms of privacy and control, so while looking to future disputes is unattractive, setting up an appropriate mechanism is worth addressing at the outset.

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