UK: Stretching Intellectual Property to Maximise Royalties

The life sciences sector has long embraced the use of licensing throughout the drug discovery pipeline, from the in-licensing of promising new compounds to eventual out-licensing of manufacture of the approved product. With increasingly diverse techniques now employed in the drug discovery process, licensing specific technologies and expertise is becoming ever more popular. For instance, a biotech company concentrating on innovation and research might also out-license access to its library of lead compounds relating to a particular target. This provides revenue for the biotech company for development of its own compounds, and establishes the relationship with Big Pharma for potential out-licensing deals in the future.

Some commentators believe the industry’s love affair with licensing is set to become even more intense. Recent consolidation e.g. the merger of Pfizer and Pharmacia, they say, will inevitably lead to those products with smaller potential markets being out-licensed for development to smaller companies. Such merger activity could mark a new wave of consolidation towards ever-larger companies, increasingly dependant on blockbuster products, whether home–grown or in-licensed. Combined with the need to encourage innovation, particularly in the early stages of drug discovery, Big Pharma is becoming increasingly reliant on licensing deals with biotech to supplement its ailing product pipeline.

Given the increasing use of licensing IP in the life sciences sector, in this article we outline, from a licensor’s perspective, some of the key strategies to consider in maximising long-term revenue generation. In the life science industry IP licences typically exploit patents and know-how associated with the patent. Other rights, however, such as registered trade marks, copyright and database rights should not be over looked. Each IP right is governed by different legal rules and all but trade marks expire after a specified period. In this sector the limited life of a patent is particularly restrictive. However, knowledge of the differences between each IP right coupled with skilful licence drafting can effectively stretch the licensor’s revenue.

Generally in the UK patent protection cannot be extended beyond 20 years from the date the patent application was filed. This creates the obvious problem for patents relating to a drug which may take up to 10 years to obtain market authorisation. Patent legislation recognises this problem but only to a very limited extent. The patent may be extended by a formula which takes the number of years between these two dates and reduces it by 5 years, subject to a cap of 5 years. This is the UK equivalent of the US "Hatch-Waxman Act".

Once patented, proprietary technology is often transferred using a patent and know how license. "Know how", at least in this context, is confidential information which is disclosed to the licensor for the exclusive purpose of allowing the licensee to work and fully utilise the patent. In theory, all the information required to work a patent should be contained within the "enabling disclosure" required for the patent to be granted. However, as anybody who has ever attempted to repeat an experiment from published methodology will be aware, often essential steps are omitted. The same is true of patents – without the requisite know how a patent might not be fully exploitable or, in some cases, might be completely worthless. Disclosure and licensing of know-how is therefore crucial for licensees. But can a know-how licence also be used to effectively generate a royalty stream beyond the life of the patent? Further, there is the risk that during the term of the license the patent may be challenged and revoked causing monopoly protection to be lost, as in Eli Lilly’s loss of its patent on Prozac. In these situations separate licences for different IP rights could help preserve at least some of the Licensor’s royalties.

If two separate licences are entered in to, thus clearly distinguishing the royalty for the patent and the royalty for the associated know-how, it may be possible to enjoy the royalty for the know-how after the patent licence has expired. However, because know how is not, at least strictly speaking, a proprietary IP right, great care must be taken in considering the strict duties of confidentiality to be placed upon the licensee and the remedies available in the event such obligations are breached.

Furthermore, if some of the know-how can be embodied within a database, the extraction of the data from the database can be licensed as proprietary IP. Database rights are time limited but if the database is regularly updated or extended the duration clock can be effectively restarted. This relatively new UK IP right could therefore in certain circumstances last for ever.

In a similar way, the licensee could be granted a licence to use the licensor’s registered trade mark to promote sales of the patented product. During the life of the patent, a successfully branded product might be expected to capture a significant market share, and when the drug goes "off patent" the branded version will inevitably continue to enjoy a premium over its generic rivals. In these circumstances the licensor can continue to command a royalty in return for the licensee’s use of its trade mark.

Care must be taken however when considering these techniques because any measures which have the effect (intentionally or otherwise) of increasing the duration for which royalties would be payable in return for rights to exploit patents and/or know-how may be anti-competitive unless they can be brought within the Technology Transfer Block Exemption. The consequences of entering in to an anti-competitive licensing agreement, which does not fall within the Technology Transfer Block Exemption, can be both serious and expensive, with fines imposed on the offending entity of up to 10% of worldwide turnover.

In an arena where licensing is key for providing revenue for biotech companies in a difficult fund raising market and where Big Pharma is looking to the biotech sector for innovation through in-licensing at much earlier stages in the drug discovery process, the structure and terms of licenses have increasing importance. Dissecting out different IP rights to be separately licensed can be a powerful mechanism for stretching the life of the rights and so generate additional royalties.