What steps can life sciences licensees take to better protect themselves on counterparty insolvency?

This is the second of a series of articles looking at the implications of insolvency on life sciences transactions. Our first article considered “Why licensors and licensees in the life sciences sector need to be aware of counterparty insolvency”.

In order for licensees to best protect their position if a licensor is insolvent and/or goes into an insolvency process, they need to review their licences, with particular focus on the issues set out below.  A licence of a key product or process patent, by way of example, may be crucial to a licensee’s business.

  • The first area is termination. As touched on in the first article in this series, the licensee needs to ensure that it can terminate the licence, if it wants to, before the insolvency process begins to give it the greatest degree of flexibility. Conversely, the licensee will not want the licensor to have the ability to terminate on its own insolvency.
  • If the licensee has the flexibility to terminate, what would happen next? Often, an attempt is made to automatically transfer the IP to the licensee on the licensor’s insolvency, which will not work. The licence could provide for sale to the licensee at fair market price, but it can be difficult to establish what that means, and the administrator/liquidator may not be bound by that provision if it is not in the best interest of creditors. How can the licensee therefore secure continued access to the IP likely to be crucial to its business?
  • The licensee should consider being granted exclusivity to at least ensure that no other party or competitor can gain access to the IP. A further protection is preventing the assignment of the licence or the IP by the licensor and we will look in due course at how that would work in practice if an insolvency process occurs.
  • The licensee should ensure, as far as it can, that their licence interest is registered on all relevant registers at national intellectual property offices, if registered rights like patents are included in the licence. In addition, the licensee should obtain local advice in relevant jurisdictions as to how best to protect its position, as registration practices vary.
  • The licensee should also consider the ability to step-in and pay renewal fees in the event a licensor threatens not to pay or fails to do so to ensure survival of registered IP rights. In addition, the licensee could consider being granted security over the IP to increase its chances of continued rights post insolvency process and possible control of an insolvency process.
  • A more expensive solution is for the IP to be held in a separate non-trading entity to try and mitigate the risk of the licensor’s insolvency. The licensee could also hold shares in this entity and/or have an appointed representative as director to give it greater control over the IP. 
  • In addition to these legal steps, the licensee should be closely monitoring the financial performance of its licensor.
  • Sub-licensees of IP should also ensure that they have the right to require a direct licence from the licensor if the licensee goes into an insolvency process and think about where they stand if the licensor goes into an insolvency process.

As mentioned in our first article, there may also be related rights like marketing authorisations to consider in the context of a transaction in the life sciences sector.

There are various options open to a licensee. Not all of them will necessarily work, but the licensee should be putting as many of the protections in place as are achievable and practical to give it the best chance of continuity of rights, notwithstanding any financial distress suffered by the licensor, particularly if that financial distress results in an insolvency process.

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