To protect a licensor’s rights, a key element of a biotech license is the licensor’s right to restrict the scope of the license by limiting the field of use, often to a particular disease area.  But the license agreement only restricts the licensee’s activities, and can’t prohibit a doctor from prescribing medication outside the field of use once a licensed product is on the market.  We are often asked by our biotech clients what they can do to try to avoid the potential situation where they and a licensee (or two of their licensees) have rights to the same compound in different fields of use, and end up competitors in the marketplace.

As an initial matter, we note that this is frequent concern of our biotech clients and their pharma partners, but we have often wondered how “real” of an issue this is in the marketplace.  One strikingexample is the more than two decades, with hundreds of millions of dollars awarded in damages to each, that Amgen and Johnson & Johnson have spent in litigation over erythropoietin, or EPO, which Amgen had licensed to Johnson & Johnson on an exclusive basis, but had retained the right sell EPO itself (in identical formulation) in the United States for dialysis and diagnostics. However, absent that high-profile example, we did not find many other examples of this occurring in the marketplace.

Even so, given the Amgen/J&J example and the substantial investment of time and money devoted to bringing a drug to market, our biotech clients are rightfully concerned.  So what is a biotech licensor to do?  We have devised the following solutions:

  1. Ensure Product Differentiation.  The only true iron-clad solution is for licensees to be limited by product differentiation that allows the  licensors (or other licensees) to develop a different product with a unique patent position.  This can be done as part of formulation or through a combination product, or by differentiating the product by route of administration.  Licensees (big pharma, in particular) are pretty savvy to this, and will often pursue a unique patent position if their licenses are field-limited.   But as a licensor, if you can identify some helpful differentiators, it may help raise the value proposition of your compound.
  2. Impose Contractual Restrictions on Marketing and Promotion of Products.  Strong, carefully drafted contractual obligations around how licensees can promote FDA-approved products can be helpful.  Require that licensees’ research, marketing and promotional use remain within the licensed field of use.  Note that current FDA regulations allow a company to make scientific research findings available to doctors for then-unapproved uses. However, you can prevent licensors by contract from providing such information.
  3. Impose Penalty Royalties for Off-Label Sales.  In anticipation of the potential of off-label prescribing that surpasses a licensee’s field of use, penalty royalties can be drafted into a licensing agreement whereby a fixed percentage of any off-label sales, as measured by IMS  or other market data, must be paid to the licensor to account for sales outside the licensed field of use.
  4. Include Effective Dispute Resolution Procedures.  As no amount of careful drafting can completely eradicate the potential for overlap in restricted fields of use or off-label sales, it is critical that the parties to the contract enter the arrangement understanding such potential and draft into the agreement a mechanism for resolving any such disputes that may arise without turning to litigation.  This language can take the form of an alternative dispute resolution process, such as an agreement to arbitrate or to seek mediation.