Promoting Innovation Where Market Incentives Do Not Work Adapted from a Panel Presentation at the Les USA & Canada 2020 Annual Meeting

There are well developed paradigms for licensing new drug and biologic technologies in the biopharmaceutical space, based on widely understood principles for the development and commercialization of human therapeutics, vaccines, and medical devices that are subject to regulatory oversight. A typical license for an investigational therapeutic may involve upfront consideration, milestone payments that correspond to key inflection points in clinical development such as Phase I, II, and III clinical trials, and regulatory events such as filing of a New Drug Application (NDA) or Biologics License Application (BLA), and NDA/BLA approval by the relevant regulatory authorities. Typical license agreements also include earned royalties for a defined period, as measured from the date of regulatory approval, or based upon the terms of applicable patents, or a blend of these approaches. The financial terms of a typical biopharmaceutical license reflect the parties’ approach to modeling the anticipated future market for the technology. Many well understood and applied models that generate the net present value (NPV) and return on investment (ROI) of the technology in question assume that the future market includes populations of willing buyers and sellers over a defined, continuous period of time and a defined geography. The licensor assumes that sales revenue earned by the successful licensee will produce a royalty stream that satisfies the licensor’s expectation of the value of the technology. The licensee assumes that the volume of sales will be sufficient to recoup the licensee’s investment in the technology and in developing it to the point of regulatory approval. But what about situations where these expectations do not work?