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Risks to capturing fair value can surface for both licensors and licensees in a technology transfer deal, because the out-licensing of academic intellectual property to a start-up can be just the first part of a long, winding process before a final product is brought to market. By the time commercialization begins, the final product may comprise multiple IP components and additional parties.

Sean Sheridan, a principal with Charles River Associates, decided to review a subset of tech transfer deals over a 10-year period to determine just what types of contract provisions both parties to such deals employ to protect their downstream rights to royalty payments. A former assistant director of the tech transfer office at University of Chicago, Sheridan learned universities have become more sophisticated out-licensing partners over the past two decades or so.

“My broader experience beyond just what I saw is that universities have become more sophisticated over time,” Sheridan said in an interview.

Charles River Associates' Sean Sheridan
“If you go back 20 years or more, the kind of licensing universities were doing [was] not as sophisticated as what they do now,” he said. “That’s a good thing from the university’s perspective, you want them to be protecting their interests as much as possible. That kind of thing happens when we talk about sub-license flow-through payments, which ensure that [licensors] are going to get the same royalty paid regardless of whether it’s from the first sub-licensee or five steps down the chain to another sub-licensee, that they are not going to be cut out of the value generation.”


Charles River Associates' Sean Sheridan

“I think universities got to this place as a matter of experience,” Sheridan added. “If you go back 20-25 years, they probably did something that they wished they hadn’t and then they became more sophisticated over time.”

From an original set of 435 tech transfer transactions, Sheridan’s research whittled down the total to 55 deals by focusing on licenses pertaining to platform technology access involving discovery or preclinical stage research. The licensor had to be an academic institution and also eligible to earn sales royalties if its IP created or led to a commercial product.

Sheridan pointed out that from various sources, he learned that roughly 75% of novel small molecule drugs and biologics launched in the US are patented by a different entity than the product sponsor that applies to the US FDA for approval.

Between 1998 and 2007, roughly one-fourth of pharmaceutical products approved by the FDA stemmed from research originating at a university. And maintaining rights to a value stream can be very complex for the universities that created the IP because, on average, it takes 13 years from an initial patent filing until a novel molecule becomes an approved drug in the US.

Nearly All Deals Reviewed Protect Licensor’s Royalty Rights

One way licensors (in this case, academic institutions and their tech transfer arms) protect their downstream value rights is by including language covering sub-licensing of their IP from the original licensee (often a small start-up company) to future partners or acquirers. Sheridan found that nearly all deals provided licensors with consideration related to all subsequent sub-licensing activity, including royalties, upfront fees and milestone payments.

Sheridan discovered that in 91% of the 55 deals reviewed the university got consideration on all sub-licensee payments, while in 5% the university got rights only to royalty payments from sub-licensees. (The other 4% comprised two deals that could not be evaluated, because sub-licensee governance provisions were redacted.)

“The vast majority of agreements included a royalty pass-through in which the university receives the same royalty on sales of licensed products, regardless of whether those sales are made by the licensee or a sub-licensee,” the report notes.

Of the 41 deals in which the licensor got rights to earn-outs other than royalties from sub-licensees, in 44% (18) the university gets a fixed percentage of the upfront and milestone payments, while in 56% (23) the licensor gets a tiered percentage of those earn-outs, pegged to timing, revenue or development stage. Licensors sometimes further protected their rights by either not permitting a subsequent sub-license of the IP or requiring their prior approval of a sub-license, Sheridan’s review found.

“University licensors almost always share in the value created through sub-licensing, regardless of whether that value is derived from royalties on sub-licensee shares or from other forms of sub-licensing payments,” the report states.

Sheridan toldScrip that while he knew anecdotally that such provisions were included in tech transfer agreements, he wanted to put a number to their frequency so that clients, whether licensors or licensees, could walk into a negotiation armed with specific data.

The review also found that provisions that protect the rights of licensees often are employed by limiting either the base against which a royalty is calculated or the royalty rate itself. Known as combination product provisions – which reflect that a licensor’s original IP may be only one component of a resulting commercial product – and royalty stacking provisions, these were included in nearly half of the 55 deals examined.

The research showed that 42% (23) of the deals included royalty stacking language that places a ceiling on the royalty that the licensor can earn, while 45% (25) included a combination product provision that apportions which portion of product sales a royalty rate can be applied to. Further, it showed that 24% of the deals included both provisions.

However, universities often also included language to protect their royalty rights. Of the 25 deals containing combination product provisions, four included a royalty floor under which the licensor’s royalties could not be reduced. Meanwhile, all 23 royalty stacking provisions included a royalty floor.

Sheridan pointed out that licensors try to avoid agreements in which both of those types of provisions are included, because of “the possibility that the provisions might be applied simultaneously to the same sales, substantially lowering the effective royalty rate.” A royalty floor, however, can guard against that possibility.

“Regardless of whether you’re the licensor or the licensee, when you’re going into a licensing negotiation be familiar as possible with what types of structures are common, so that you’re not going to be surprised,” Sheridan advised. “The more familiar you can be with what types of license structures are common and which structures benefit you as the licensee or licensor, that’s very critical. That means you’re going to be as prepared as possible for those negotiations.”

Below is Scrip’s monthly roundup, including information from Strategic Transactions, of recent technology transfer agreements between companies and academic or other research institutions.

  • Pliant Therapeutics Inc. and the Cleveland Clinic announced a multi-year research collaboration on Sept. 6 to accelerate discovery of disease targets for gastrointestinal fibrosis.

  • Deerfield Management, which committed $65m in funding, and University of California, San Diego announced the inception of Poseidon Innovation LLC on Sept. 5 to fund early-stage research for disease-curing therapeutics. ( (Also see "Finance Watch: Three New Funds, Including Former Amgen R&D Head Harper's Next Venture" - Scrip, 7 Sep, 2018.))

  • Precision BioSciences Inc. and University of Pennsylvania unveiled a gene-editing collaboration Sept. 4 to use the biotech’s proprietaryARCUS genome-editing platform in a program focused on three gene-knockout programs and up to three gene-knock-in or gene-repair programs.

  • Boehringer Ingelheim GMBH and Japan’s Tsinghua University announced a collaboration Sept. 4 aimed at developing novel breakthrough therapy approaches that would apply immune modulation to infectious diseases.

  • SanBio Co. Ltd., focused on regenerative medicines for neurological disorders, acquired a patent portfolio Sept. 2 pertaining to development of therapies derived from mesenchymal stem cells from Tulane University.

  • KinoPharma Inc. and Japan’sNational Institutes for Quantum and Radiological Science and Technology unveiled a collaborative research contract on Aug. 28 to evaluate the potential efficacy of KinoPharma’s KPO1143 in preventing the accumulation of tau protein in Alzheimer’s disease.

  • Privately heldEvecxia Inc. and Duke University  announced Aug. 28 an expansion of their 2015 licensing agreement around EVX-101, an oral slow-release formulation of 5-hydroxytryptophan (5-HTP) and low-dose carbidopa being studied in treatment-resistant depression.

  • Gene therapy biotechGenprex Inc. announced Aug. 28 that it has agreed to the extension of two option agreements with MD Anderson Cancer Center  regarding the use of TUSC2, the active agent in Genprex’s lead candidateOncoprex, which is being studied in combination therapy with checkpoint inhibitors.

  • BlackThorn Therapeutics Inc. unveiled a multi-year collaboration Aug. 6 with Yale School of Medicine's division of Neurocognition, Neurocomputation, and Neurogenetics (known as N3) to advance its understanding of the neurobiological basis of dysregulated mood and behavior.

  • From the editors of Start-Up.

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