Oren Livne Anat Polyachenko January 25 2023 Life sciences licensing from US universities – six areas to consider Baker McKenzie | Healthcare & Life Sciences - USA Oren Livne, Anat Polyachenko Healthcare & Life Sciences Diligence obligationsPatent prosecution and enforcementRepresentations and warranties, indemnification, and liabilitySublicensing rightsReservation of rightsFinancial termsMany successful pharmaceutical products and medical devices began as inventions in US university laboratories. Successfully establishing and managing the complex relationships between industry and universities requires appropriately negotiated and drafted licence agreements. This article describes six important considerations for those negotiations and agreements, taking into account the unique regulatory and policy issues and customs that have evolved in US university licensing.Diligence obligationsAs educational and research institutions, a key mission of many universities is to generate and transmit knowledge for the benefit of both their students and the wider society. To meet this public benefit mission, universities will typically include diligence obligations on their licensees to ensure the licensed inventions are developed and commercialised and not "shelved", whether due to a licensee's lack of efforts, desire to protect competing product lines, or inadequate financial or technical resources.These diligence obligations can take the form of "commercially reasonable efforts" requirements on the licensee to perform development and commercialisation. In addition, universities may seek to include invention-specific development milestones to be met by fixed dates, such as:initiating or completing certain phases of clinical studies;securing regulatory approvals; orachieving a first commercial sale.Given the significant uncertainty in developing life sciences inventions, if these fixed date obligations are included, the licensee should seek to build in automatic extensions for issues outside of their control (eg, regulatory authority delays) and also include a mechanism for additional extensions (eg, by payment of an added fee). Where broad fields of use are granted, universities sometimes also include a requirement that if a specific field (eg, treatment for a given disease) is not being exploited and a third party indicates an interest in that field, the licensee must either initiate exploitation or grant a sublicence (and if the licensee does not do it, the university can step in and grant rights to the third party for that field).The repercussions for failing to meet diligence requirements can be severe – the university could have a termination right. Licensees, therefore, can benefit from negotiating more limited remedies where possible – for example, in lieu of termination, having an exclusive licence reduced to a non-exclusive or limiting termination to the fields of use that are not being exploited.Patent prosecution and enforcementUniversities typically desire to maintain control of patent prosecution and defence for their inventions. As the owner of the technology, they have a strong interest in protecting their rights in a way that promotes the continuing expansion and adoption of the technology (eg, a new drug or medical device). To protect its interests, the licensee can require the university's commitment to prosecute patents covering the licensed technology (potentially with mutually agreed patent counsel) or, if the university has a right to opt-out of prosecution, include a step-in right for the licensee to obtain control if the university elects not to continue with the prosecution.Where the university is prosecuting, the licensee will typically receive copies of all material correspondences and filings with the patent offices and have a right to provide comments. The extent to which universities must incorporate a licensee's comments is negotiated, with a somewhat common middle ground being the university agreeing to include additional claims requested by the licensee to protect the products contemplated to be developed under the licence agreement.If the licence is exclusive, the licensee will typically bear all the costs of prosecution and maintenance, regardless of whether it or the university is in control. If there are multiple licensees (eg, in different fields or if the licence is non-exclusive), each licensee often bears a proportional share of costs.An exclusive licensee will often have the first right, at its expense, to enforce the licensed patents if a third party is infringing in the licensed field, with the university having step-in rights if the licensee elects not to enforce. An exclusive licensee may require that the university join the suit in order to have standing to sue, so it is important that this right be included. Certain public universities may be unable to commit to join suits in advance (eg, because approval of the board is required at the time of joining), in which case a process for securing this approval can be included.Representations and warranties, indemnification, and liabilityUniversities often resist providing the licensee with any significant representations or warranties and rather require the licensee to rely on its own due diligence. As a middle ground, a university may agree to very limited representations and warranties, such as that it owns the intellectual property being licensed, has the right to enter into the licence agreement and to grant the underlying licenses, and has secured all necessary inventor assignments.Universities also often resist providing any indemnification of the licensee, particularly if the university is not conducting any research or development on its own. On the other hand, the licensee will typically be asked to assume all responsibility for any product or other liability arising from the exercise of the licence covering the invention. Under these circumstances, the licensee can often carve out any losses or damages that are the university's fault (eg, its negligence, wilful misconduct or breach of the agreement).Sublicensing rightsUniversities often try to exert significant control over sublicensing rights, which can be problematic for licensees. For start-ups or other small companies, getting a drug through the Food and Drug Administration approval process and to market is a long, expensive and risky process, so they frequently seek to partner with or out-license to a larger pharmaceutical company. For established companies, flexible sublicensing rights can be essential to implementing their development and commercialisation plans.Negotiating leverage will play heavily into the agreed level of university control, which can range from the licensee having to obtain the university's approval of the identity of the proposed sublicensee and the sublicensing terms to complete flexibility on the licensee's part as long as the sublicensing terms are consistent with the licence agreement.Another issue to consider is what happens to a sublicence upon the termination of the licence agreement. Universities will often agree to negotiate in good faith directly with the sublicensee upon licence termination, but this may not be satisfactory to many sublicensees who will want assurance that their sublicensed rights will survive. Where survival of sublicence agreements is not included as part of the initial licence agreement, a side letter among the university, licensee and sublicensee will often be needed to give the sublicensee sufficient comfort to enter into a sublicence agreement.Careful consideration of these sublicensing issues early in the process can be crucial to successfully negotiating a licence that will ensure that both sides' needs are protected.Reservation of rightsAs a non-negotiable point, universities will often reserve rights for themselves and other non-profit organisations to use the technology and practice the inventions for academic teaching, research and educational purposes (even if the rights granted to the licensee are exclusive). In addition, if US federal funds were used to create the licensed technology, the Bayh-Dole Act 1980 will apply and, among other things:the federal government will have non-exclusive use rights; andwhere exclusive rights are granted, products sold by the licensee in the United States will need to be substantially manufactured in the United States.Financial termsThe payment structures and amounts flowing from a licensing relationship vary widely based on case-specific factors. Common payment structures include, either alone or in combination with one another:upfront fees;royalties;maintenance fees; andmilestone payments.University deals tend to be early stage, which is reflected in the financial terms.According to a survey by the Licensing Executives Society, the average royalty rate in the life sciences industry in 2021 was 5.65%. Royalties are most often based on a percentage of the net sales of licensed products. Milestones may be linked to specific development achievements (eg, initiation of clinical trials or receipt of regulatory approvals in a specific country) or commercial achievements (eg, net sales of products exceeding a given threshold). Universities may also accept equity, usually common stock, in exchange for a reduction in certain fees, especially from start-up companies. Part of the university's payment may include a portion of sublicensing revenue (eg, if the licensee itself does plan to ultimately commercialise the product and the value of the licence is not fully reflected in the other payments).For further information on this topic please contact Oren Livne or Anat Polyachenko at Baker McKenzie by telephone (+212 626 4100) or email ([email protected] or [email protected]). The Baker McKenzie website can be accessed at www.bakermckenzie.com.