In our last blog of our series on licensing biotech in universities, we defined terms to be used within this very specific niche of contract. In this third installment, we will discuss the inherent rewards in such an arrangement. How do you establish and enforce a payment structure?
When negotiating this part of the contract, it makes sense to refer back to each party’s intrinsic motivation for considering the partnership in the first place: The university hopes to achieve a fair return on their investment of research and development into the project, and naturally the biotech company expects to earn a fair profit after considering various regulatory, legal, and commercial risks.
Form(s) of payment, too, should be appropriate to the situation with regard to the specific rights and responsibilities of each party to the contract. Depending upon multiple factors, payments can vary from upfront fees, milestone payments, or royalties, or any combination thereof, as appropriate. Calculations for these payments can be based upon fixed amounts or percentages of sales.
Each of these fee structures can carry various pros and cons for each side of the partnership. For example, upfront fees to the academic investor can help to fund research and development. On the downside, the final commercial valuation for any biotech product can be difficult to estimate from the outset, particularly when success of the entire project depends upon performance in human clinical trials.
Royalty payments are a common component of licensing contracts, but the contract must carefully stipulate the products and/or services subject to the royalty bearing. Royalty payments are motivating, but also hinge on the assumption of long-term performance when research and development can require significant time and investment of resources. This can represent risk for the organization who must wait for a payoff.
Milestone payments can serve as a way of bridging the gap between valuation expectation and actual performance in the market. Various risks exist on both sides of the table, and so events which trigger milestone payments must be meticulously defined.
Finally, even the most carefully considered and draft contract can become the subject of dispute. Even when terms are defined, and rights and responsibilities clearly set forth, the contract must also include highly specific language on conflict resolution and enforcement of the terms.
For more information on licensing Biotech IP in university partnerships, contact our office.