Like every other company, pharmaceutical companies need a marketing strategy to make new drugs and drug products accessible at a local, national, and global level. In recent years, out-licensing has quickly become an important and well-recognized marketing strategy in the global pharmaceutical sector. More pharmaceutical companies have turned to out-licensing given the increasing cost of drug development, marketing, and competition. Drugs, brand names, and research products are being out-licensed for production completion or marketing.
Pharmaceutical companies use out-licensing to find partnership(s) that will enable them to get in-house developed drugs, drug products, or research products to the target audience. Out-licensing creates an opportunity for companies to develop or boost their portfolio and gain massive and rapid ROI. These companies may partner with marketing companies, legal firms, and even another pharmaceutical company to achieve this. Here, we will carefully examine out-licensing, its purpose, how it works, and its benefits to pharmaceutical companies and the global pharmaceutical sector as a whole.
What is out-licensing?
Out-licensing refers to the sales of the rights to a fully or partially developed or potential drug or drug product, brand name, etc., to a marketing firm or another pharmaceutical company (third party) for marketing or further development and production. This process usually involves two or more parties (pharmaceutical companies, marketing firms, etc.). In out-licensing, the innovator (licensor) transfers its right to intellectual property to a third party (licensee) for manufacturing, development, or marketing within a particular geography for an agreed period, which is renewable. The licensee is expected to pay a royalty or license fee for the licensed product based on mutual agreement between the two parties. This process entails certain legal actions and processes that ensure patent protection.
How does out-licensing work?
The out-licensing process is a well-thought-out process and is expected to yield positive results if followed carefully. In most cases, out-licensing is carried out by small and mid-sized pharmaceutical companies because of a lack of funds or the capacity to handle the production, clinical trials, or marketing process. These companies set out marketing departments or outsourcing firms to identify potential in-licensing companies and opportunities and carry out the out-licensing process.
The steps involved in out-licensing include lead generation, shortlisting (based on specific areas such as dosage form, therapy focus, etc.), one-sheet document creation, approach, and connection to the target company, presentation of information memorandum (IM) or Non-confidential Information Package (NCIP), NDA or CDA signing, Presentation and Collection of business proposals, Signing and exchange of term sheet, exchange of relevant data, final agreements, payment of fees depending on the contractual agreement.
This process primarily involves searching for partnership (s) with an in-licensing company or firm to assist in product manufacturing, development, production, sales, or marketing. The licensor and the licensee have a mutual agreement on the development or commercialization of the drug, patent, brand, or technology in exchange for a one-time payment, upfront fee, milestone payment, or payment of royalties upon completing a specific development or commercialization steps. These agreements operate on a quid pro quo basis. Most pharmaceutical companies tend to opt for payment plans that include recurring payment of fees.
What is an example of out-licensing?
Over the years, several large, mid-level, and small pharmaceutical and biotech companies have adapted to out-licensing to cut development investments and increase returns on investments. Many pharmaceutical companies have gone into out-licensing deals to partake in its benefits.
A commendable out-licensing example is the Ortho biotech and Millennium Pharmaceutical Velcade out-licensing deal. MLNM’s Velcade, which was approved for the treatment of multiple myeloma in the US, was out-licensed to Ortho biotech. This out-license deal was made with a $15-million upfront payment and a milestone deal of $750-million, with 75% of this payment coming from oncological applications.
What is the difference between a license and a contract?
Although a license and a contract may be made for similar reasons, they are quite different. In contract manufacturing or contract agreements, the innovator or seller continues to maintain exclusive rights to the intellectual property and pays for the manufacturing, development, or marketing process. Here, the contracted manufacturer holds no rights over the assets. On the other hand, in-licensing, the licensor, seller, or innovator's hands or sells the right to the intellectual property to the licensee or partnering firm and is paid a licensing or royalty fee based on the agreement made. However, note that the licensor maintains right over the innovative products, which can be lost in the agreement cycle or product life cycle.
Pros and cons of out-licensing
A licensing agreement gives the licensee or partnering company rights to use, manufacture, develop, or sell an intellectual product (drug, brand, patent, technology, etc.) owned by the licensor or innovator. The rights to be given are outlined, reviewed, and signed by both parties. The type and extent of rights leased or sold are usually dependent on the licensing agreement's purpose.
Out-licensing provides several advantages and disadvantages to both the licensor and licensee. It is paramount that these advantages and disadvantages are considered before final agreements are made.
What are the pros of out-licensing?
Out-licensing provides the licensor and licensee with many benefits. With the increasing cost of drug or drug product manufacturing, development, clinical trials, and commercialization, out-licensing has become a go-to option for various pharmaceutical companies. By out-licensing, licensors reduce the financial burden of manufacturing, production, or commercialization of patents and create a source of passive income and revenue. In license agreements, the licensor retains ownership of the intellectual property asset while also receiving royalty income from it.
The recurring payments received from the licensing agreements are highly beneficial to the licensor and also the licensee. Pharma companies can use out-licensing to gain access to new or foreign markets and enlarge their portfolios. Licensees with threatened market positions from competitor companies can also benefit from this by introducing new products into the market. The licensor and licensee also experience a reduced risk of business development.
What are two possible risks involved with out-licensing?
As with every other marketing or business development strategy, out-licensing comes with many risks. Although these risks are avoidable, they are inevitable and may be detrimental to both parties. Out-licensing or licensing agreements put the licensor, innovator, or seller at risk of losing complete or partial rights to the intellectual property. Loss of intellectual property right is the greatest risk associated with this process. Given the nature of licensing agreements, the licensor is dependent on the skills and resources of the licensee for the generation of revenue. However, there may be a loss of or no revenue generated if the licensee is ineffective or incompetent. This is even more devastating in the case of an exclusive license.
What are the cons of out-licensing?
Licensing agreements or out-licensing also present the licensor and licensee with various disadvantages. The out-licensing deals involve partnership and relationships with individuals, and as a result, interpersonal and -company/community conflicts are inevitable. Out-licensing gives room for intellectual property theft, misuse, and piracy. Problems with the development, manufacturing, or commercialization process can leave a dent in both licensor and the licensee's reputation. For example, the production of poor-quality drugs such as synthetic vaccines can greatly affect the reputation of both companies.
Also, revenue generation is not guaranteed as sales may or may not be made, and this is dependent on various factors. Royalty fees aren't always instant and may take a while to arrive based on sales made. Finally, due to a lack of transparency and integrity, licensees may be at the risk of royalty litigation. Royalty litigation incurs high costs of legal action on the licensor.
Best Uses for the out-licensing processes
There are several reasons why companies consider out-licensing processes, and they differ from one company to another. However, two uses are uniform among all the companies that consider the out-licensing processes. The first is to build strategic partnerships with other companies that have a wider reach. Strategic partnerships are the foundation upon which many of the big pharmaceutical companies we know today thrive. Once a company studies the market and finds out that owning a drug's license will limit its market share, they consider out-licensing. With the processes involved, drug companies can grow to leverage companies' brand quality they are out-licensing to.
Another use of the out-licensing process is to get a particular product in the right hand. It is one thing to engage a good marketing strategy; it is another for such a strategy to yield the desired results. Using the out-licensing processes can help a company reach its target audience faster and better and get its products to the right hands.
What are the best uses for the out-licensing process?
If you own a drug company and you are considering the out-licensing process, the best use of it for you will be in the area of finance. While the financial relationship involved in out-licensing differs from that involved in other licensing types, it can yield a lot of financial return. Knowing the right company to grant the license to, the best time to do so, and documentation of the process are the best ways to go about the out-licensing process.
Where can you find out more about out-licensing?
Out-licensing is a precise and popular process, not just in the pharmaceutical sector but also in every other business sector. Business owners can gather more information on outsourcing from the internet, the licensor, marketing firms, and outsourcing firms. These platforms give a detailed explanation and understanding of out-licensing, the processes involved, benefits, drawbacks, and examples of out-licensing. Also, to make the learning process easier, many online courses concerning out-licensing are available on different e-learning platforms. E-learning platforms such as Informaconnect, eDx, Alison, etc., have made simple courses available to interested individuals.
How do companies use out-licensing to their advantage?
Not all companies can reach out to their target audience as much as they want to. Even with a good marketing strategy, there are prospects that the company may not reach. This is where out-licensing comes to play and how pharmaceutical companies use it to their advantage. By out-licensing a drug, a company studies the market for players with an extensive reach. These players have the audience but do not have the drugs. Companies their give license to such players and, in turn, make a handsome profit from it. In doing this, pharmaceutical companies make sure to sort all the legal paperwork that secures the out-licensing process and strict payment of licensing fees.
How to out-license your company’s drug
Drugs, drug products, patents, etc., all follow a basic out-licensing process to establish a licensing agreement. However, although the primary process remains the same for all intellectual properties, there are a few differences in follow-up or prior processes carried out.
How do you out-license your brand name?
Once your brand name's value or potential is recognized within a particular niche, locally, nationally, or globally, it can be used as a strategic means for brand growth, push a new product into the market, etc. In brand licensing, you lease or sell the rights to your brand name, logo, or intellectual property to a partnering company to use their products. The leased brand is used within a specified time and for specific purposes based on the two companies' contractual agreement. The licensor is then paid a financial remuneration for the intellectual property leased.
The steps involved in out-licensing include building and establishing your brand name, establishing licensing guidelines, licensing to trusted companies, limiting licensing extensions, implementing license training to ensure the manufacturing or production of quality products, and monitoring brand reputation as concerned with the use of licensed products. These are essential additional steps taken when leasing your brand name to a licensee.
How do you out-license your company’s drug?
The process of out-licensing your company's drug starts with identifying a company that requires permission to use your drug or drug product. It also includes the process of drafting a licensing agreement that suits both parties. Where you produce the drug but lack the resources to market it effectively, it is best that you find a larger pharmaceutical firm and license them. By doing so, you are giving them the approval needed to either complete the drug's production process, market it, or do both. Also, this licensing could give approval to run a drug test, alcohol test, or access to any of the other random drug testing procedures.
What are some of the drawbacks of the out-licensing process?
Finding the right licensee for the out-licensing is difficult and may be prolonged. Another drawback is the possible misuse when it is a sensitive product like marijuana. Substance abuse remains one of the major drawbacks of out-licensing. Brand names, patents, drugs, and drug products, will stand a better chance at success if the right licensee is found and the license agreement, well structured. Although this process is beneficial and has been used by various pharmaceutical companies globally, it has some drawbacks that may significantly affect the process's success.
A few of these include the risk of complete or partial loss of control or right over the innovative product, royalty litigation, poor marketing strategy and execution, IP theft, and many others. There is also the possibility of a testing program or inability to reach a potential license application agreement. These downsides are significant causes of concern that are likely to impact the result of this process.
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