What Is Patent Licensing & How Does It Work?
Last updated on April 18, 2023 by
If you read our article about patents, Intellectual Property & Why It’s Important to Your Startup, you know it’s essential to protect your intellectual property, especially when you’re in the early stages of developing a life sciences or healthcare company. Patents and patent protection play a large role in the development of biotechs.
But the utility of patents extends beyond simply acquiring and maintaining rights to intellectual property. Patents can be critical assets that life sciences startups can leverage to achieve short-term and long-term goals.
Through patent licensing, researchers and startups can leverage their patents to establish themselves as formidable players in the industry, bring in revenue for the business, and build partnerships with larger pharmaceutical companies.
The relationship between smaller biotechs and pharmaceutical companies has grown stronger over the years as Big Pharma continues to turn to smaller organizations that can develop new drugs or molecules quickly enough to obtain a patent.
If you’re a biotech founder, you may be able to license your patent to another company to generate revenue or license a patent from someone else to develop a sellable product. If you’re planning on doing so, read on to learn more.
That said, when it’s time to strike up a license agreement with another company, make sure you consult with a legal professional who is well-versed in licensing, patent law and regulatory know-how. This can help you avoid any tricky situations or unfair terms.
What Is Patent Licensing?
In short, patent licensing is the process by which the owner of a patent (the “licensor”) allows another party (the “licensee”) to use a patented invention, often along with related know-how. In exchange for this right, the licensee typically pays the licensor a fee, which can be a one-time or a series of ongoing payments.
Patent licensing and licensing in general play a vital role in the life sciences by allowing companies to access and use inventions that can help to improve healthcare and treat diseases.
There are different types of patent licenses, including, exclusive licenses, which grant the licensee the right to be the only party using the patented invention, and non-exclusive licenses, which allow multiple parties to use the patented invention. Licenses can also be limited to specific fields of use or geographic regions or time durations.
The terms of a patent license are outlined in a written agreement between the licensor and the licensee. This agreement can cover a wide range of issues, including, the responsibilities of each of the parties, the scope of the license, the duration of the license, and the payment terms.
How Patent Licensing Works
Patent licensing offers patent holders a way to generate revenue by transferring patent rights to another company or individual that will use the licensor’s patented technology or products. How the patent is used can differ. It can be developed into a product to sell, used as part of a strategy to create and manufacture a sellable product, or even exploited in selling another product that uses the patented technology.
Organizations that generally participate in patent licensing and technology transfer include biotech, biopharma, pharma companies, universities, and research institutions. Each organization will have a specific reason to license out or gain access to a patented invention. Companies can range from small labs to larger enterprises licensing out a patent. Many companies that license another business’s patent include well-known pharmaceutical behemoths.
In the life sciences, patented inventions can include new drugs, medical devices, diagnostic tests, and other products or processes related to healthcare.
There are different ways to leverage licensing as a business strategy. The first is to use patent licensing to bring revenue into your laboratory while building relationships and increasing exposure, and the second is to avoid intellectual property lawsuits with large companies who can easily outspend you even when you’re in the right.
The terms of a patent license in the life sciences may vary depending on the nature of the patented invention and the needs of the licensor and licensee. For example, a license for a new drug may involve the payment of royalties based on the sales of the drug, while a deal for a diagnostic test may involve a one-time license fee.
Types of Patent Licensing
There are several types of patent licenses you can use. However, the two primary types are exclusive licenses and non-exclusive licenses.
Under an exclusive license, the licensee would be the only party to use the patent during the agreed-upon timeframe. This license is often granted for a specific geographic region and time period.
Non-exclusive licenses allow the licensor to license to many licensees. A non-exclusive license is often used when the patent owner wants to allow multiple parties to use the technology or product or when the patent owner is unsure of the commercial potential of the technology or product.
Other patent licenses include sole licenses, sublicenses, cross-licenses, and voluntary licenses.
Sole licenses are similar to exclusive licenses in that only the licensee can use the patented technology or product for a specific purpose. However, in a sole license, the licensor retains the right to use the intellectual property. Sublicenses are granted by a licensee to a third party to use the patented technology or product. The licensor may or may not allow licensees to grant sublicenses.
Cross-licenses occur between two or more parties, allowing each party to use the other party’s patented technology or products. A patent owner offers voluntary licenses to a potential licensee without any legal obligation to do so.
If you’re exploring a limited-time partnership with a larger company, patent licensing can be an appropriate way to establish a symbiotic collaboration as long as the license terms benefit both parties.
Advantages & Disadvantages of Patent Licensing
There are both pros and cons to licensing a patent to another company or licensing a patent from another company, depending on whether you are the licensor or licensee. Let’s review some of the more common advantages and disadvantages:
- Monetization: It allows a company to monetize its patented technology or products by receiving payment from other parties in exchange for the right to use the patented innovations. This can provide a steady stream of revenue for the company.
- Collaboration: Companies can collaborate and share resources, expertise, and risk. For example, a biotechnology company may license its patented technology to a pharmaceutical company with the resources and expertise to develop and bring it to market.
- Distribution: A business can expand the distribution of its technology or products to a broader market. By licensing its patents to other companies or individuals, a company can reach a more extensive customer base and potentially increase its revenue.
- Access to technology: You can access technology or products that another party may have not yet developed or produced on their own. This can be especially valuable for small companies or startups needing more resources to invest in research and development.
- Risk reduction: You can reduce the risk of investing in developing and commercializing a new technology or product.
- Dependence on the licensor: When a company licenses a patent, it becomes dependent on the licensor for access to the patented technology or product or special know-how. This can create a risk that the licensor experiences financial or other difficulties or if the relationship between the two parties breaks down.
- Limited control: A company that licenses out a patent may have little control over how the patented technology or product is used, especially if it is granted through non-exclusive licenses. The licensor may also retain certain rights, such as the right to terminate the license or to enforce particular terms and conditions.
- Royalty payments: You may be required to pay ongoing royalty payments to the licensor. These payments can be a high ongoing cost, especially if the licensed technology or product is not successful in the market.
- Competition: Licensing can create competition between the licensor and the licensee, especially if the licensor is also active in the same market. This can lead to conflicts of interest and affect the relationship between the two parties.
- Loss of exclusivity: If a company licenses a patent exclusively to another party, it may lose the ability to use the patented technology or product itself. This can limit the company’s ability to exploit the full potential of the technology or product.
Steps to Licensing a Patent
To license a patent to another company, you’ll typically follow these steps or steps similar to these:
- Identify which patent you will license: This may involve searching through your company’s portfolio of patents to find a suitable technology or product.
- Identify potential licensees: With a patent identified, you’ll want to find potential licensees interested in using the patented technology or product. This can involve researching companies in the same or related industries or consulting with industry experts or advisors.
- Sign a confidentiality agreement: You want to protect your intellectual property rights before you begin sharing information about your patent. Signing a confidentiality agreement with the potential licensee can be beneficial before you start negotiating. All deals won’t get to execution, so the confidentiality agreement may be key.
- Negotiate the terms of the license: With a potential licensee interested, you’ll want to negotiate the terms of the license, including the scope of the license, exclusive or non-exclusive, its duration, any royalty and other payments that will be required, and any other terms. These are frequently memorialized in a binding or non-binding term sheet.
- Draft the license agreement: After the license terms have been negotiated, you will have to draft a license agreement that reflects the agreed-upon terms. The contract should include detailed information about the patent, the licensee, and the terms of the license.
- Review and sign the agreement: Both parties should review the license agreement carefully to ensure that it reflects the agreed terms and that it is legally enforceable. Once you and the licensee are satisfied, you can sign and finalize the deal.
What Is a Patent Assignment?
A patent assignment is a legal document that transfers ownership of a patent from one party to another. The party transferring ownership is the assignor, and the party receiving ownership is the assignee. It differs from a patent license; however, like a license agreement, it can be a mutually beneficial arrangement for the parties involved, as it can help each party leverage its strengths and expertise to bring a new technology or product to market.
When you file a patent assignment, you permanently transfer exclusive rights. This transfer is part of the official patent record. The assignee typically pays a lump sum upfront, and the patent owner relinquishes its rights to the patent
The agreement should include the details of the patent being assigned, including the patent number and the date of issuance. It should also include any relevant terms of the assignment, such as the payment of fees or royalties.
If you want to be acquired or start a long-term partnership with a pharmaceutical company, a patent assignment may be part of your agreement with them. In addition to an upfront payment or future royalty payments (or both), there are several reasons why a biotechnology company might choose to assign its patent to a pharmaceutical company.
One reason is that the pharma company may have the resources and expertise to develop and bring the patented technology or product to market. The company may be able to fund the development and commercialization of the technology or product, while the biotech may need more resources or experience to do so.
Furthermore, the pharma company may be better positioned to commercialize the technology or product, either because it has a solid sales and marketing team or because it already has a presence in the market where the technology or product will be sold.
Before you speak with your lawyer about moving forward with a deal, we recommend this article in the National Law Review which explains your options in greater detail. You will better understand how to structure your patent licensing agreements in the most advantageous way possible.
It’s important to note that a patent assignment must be recorded with the appropriate government agency, such as the United States Patent and Trademark Office (USPTO). This ensures that the assignee’s patent ownership is appropriately recognized and protected.
From Licensing to Big Deals
Big Pharma can seem so monolithic that it feels impossible to compete against what they are doing. We encourage smaller companies to re-imagine that mindset and view their relationship with big pharma as complementary.
Even though large pharmaceutical companies may have a monopoly on specific drugs or illnesses, their size can often slow them down regarding research and development. It’s much harder for them to pivot into experimental territory, and internal bureaucracy makes it impossible for them to be as nimble as a startup.
Pharma has come to depend on startups and academic research to build expertise in niches they can’t reach. More and more small biotechnology companies are discovering new molecular entities, which, through pharma-biotech partnerships, help pharma companies fill out drug pipelines and expand into emerging drug development spaces.
Biotechs, in return, get an injection of much-needed capital, a new partnership with a company packed with resources, and even exposure to other players in the industry. This is where patent licenses can come into play.
Whether you’re forming a short or long-term partnership through your licensing strategies and initiatives, biotech startups can leverage a pharma partnership to make significant product advances.
As we mentioned in our article about funding—Biotech funding: what are your startup’s options?—partnerships with pharmaceutical companies can be a great way to get your research and development projects funded and may lead to an eventual acquisition.
How to Pursue Pharma Partnerships
We mentioned that one of the steps to patent licensing involves finding a potential licensee. But we wanted to dive into that a little deeper. How exactly can you find someone interested in licensing a patent from you? The first step is evaluation.
Evaluate the Licensee
When evaluating partnerships with large pharmaceutical companies, identify which ones will bring actual value to your company by increasing visibility and providing resources or funding. They will also want you to bring value to their business.
Large pharmaceutical companies are looking for startups with novel products that have demonstrated success, have backup plans if specific formulations don’t work, own their intellectual property, and are ready to move into clinical trials or manufacturing.
If you start networking and building relationships early, you’ll be able to have conversations with the right people to get the process started.
You can read “The Blueprint for a Successful Partnership” and listen to the accompanying podcast to learn how RBC Capital Markets, a well-established investment banking firm, approaches creating a successful partnership between biotechs and Big Pharma.
One of the critical points Noël Brown and Greg Wiederrecht, Ph.D.(the authors of “The Blueprint for a Successful Partnership”) make is that biotech and pharma strategic partnerships are essential to drug development. They also reflect on how partnership dynamics have changed over the last decade as biotechs have seen increased access to capital, shifting the power balance between Big Pharma and smaller biotech companies.
Furthermore, they point out that while research tools and expertise that were once in the pharma domain have become democratized in many ways, biotech-pharma partnerships remain beneficial to the life sciences and healthcare industries.
Evaluate Your Patent
What makes it unique? Does your patent provide an irreplaceable product, technology, or feature to the market? Understand your patent’s value fully and determine whether or not it will be able to generate revenue. The potential for commercialization needs to be high; otherwise, companies will likely not be interested in your license.
After you’ve identified with whom you want to work and the strength of your patent, you’ll better understand which companies will become licensees.
Don’t forget that investor interest in small biotech companies continues to increase, so you’re in an excellent position to negotiate. However, not every pharmaceutical company will be interested in you, and vice versa.
While Patent Licensing Can Help, Investor Dollars May Be Necessary
Bootstrapping a biotech company is possible, but it is often highly challenging. Through grant funding, patent licensing, and excellent luck, it’s possible to build a private company that can sustain itself financially and experience significant growth over time. You may be bootstrapping yourself right now.
This is doing things the hard way. It helps you retain control and direction of your business and allows you to remain private, but it is only sometimes a viable path for accelerated R&D and going public.
If you are planning to build a huge company and go public, you’re most likely looking to find investors to back you.
In the case of investors, they will want equity in your business in exchange for the capital they provide. It can be a hard pill to swallow. Your share of ownership of your business will be diminished and you won’t know whether the partnership will ultimately work out. The results of a failed partnership can look pretty ugly.
But if you’re not planning to quickly build something huge, you might be better off focusing solely on creating patentable technologies you can license out and developing other revenue generation channels, such as contract research.
In that case, you can grow slowly and retain 100% control and direction of your business. Do your best to learn as much as you can about licensing and other deal structures in the life sciences that you can leverage to keep the lights on.
But no matter what, it’s all about being able to pay your bills. To keep working, you’ll need money, whether secured through a licensing deal, an investor, or a financer (we haven’t mentioned loans, but debt financing can sometimes be an option as well).
Ideally, you approach revenue generation and fundraising in a multi-faceted way. This path forward can involve protecting your intellectual property through patents, trademarks, and trade secrets and leveraging a thoughtful patent licensing strategy to generate revenue, so you don’t have to rely entirely on external investors to fund your business.
But more often than not, you will have to rely on investors at least to some degree to keep the lights on. This is even more apparent when considering research and development costs. That said, your chances of raising a successful round with some early-stage investors can improve if you have a patent or several patents protecting your intellectual property.
Remember that anyone willing to take on the significant risk of investing in your company (let’s face it, early-stage biotechs are risky businesses) is likely also looking for big rewards. As mentioned, you will have to give up some control and equity in exchange for their investment.
If an investor is interested in funding your potential success, they will contribute as much as possible to make it happen. At the same time, you may have to compromise how you run your business.
One of the things that makes acquisition or investment appealing for startups is that they gain the ability to scale the production of what they are making quickly. Not only do pharma companies or VC investors have the resources that young companies dream of, but they also can take on much more risk and invest more in a product whose market has yet to be proven.
Starting with a strategic partnership structured around a specific product or technology can be a helpful way to see if an acquisition that supports your goals would be a viable option for you. As you work together, you can explore how a long-term partnership or acquisition would look.
Not all roads lead to an acquisition or IPO, but you will want to explore every fundraising avenue available.
Collaboration is the Bedrock of Scientific Innovation
From the outside, patenting a technology or product can feel combative, and it can feel like pharma has an unbreakable monopoly on the drug market. However, this outlook can hinder the progress of what we care about most: scientific innovation.
While ostensibly draped in potential legal battles and shrewd, seemingly hostile strategy, intellectual property rights are especially advantageous to protecting inventions in the biotech industry, forming strategic partnerships with Big Pharma, and advancing new products to market when it may have been impossible otherwise.
Small startups can significantly benefit because the patent portfolio can become an asset leveraged for financial gain and relationship building, providing access to resources and expertise that may be unavailable.
Depending on your outlook, you might pride yourself on being a disruptor of the pharmaceutical industry, but don’t let that get in the way of using big pharma or investors to help you advance your R&D efforts. From patent licensing to partnerships to acquisitions, there are many ways to work with other companies to create the most innovative products in the industry and bring your vision to life.