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Pharmaceutical companies often use licensing agreements to share the risk and costs of developing new drugs. Inlicensing partnerships allow companies to combine their expertise and share profits from the final product. These agreements can also be used for distribution in foreign countries.
In the research and development of many products, especially pharmaceuticals, costs can be extremely high, making companies think about developing a drug. Licensing takes the risk away in one of several ways to mitigate some of the dangers associated with the product, such as a new drug. Licensing is something that many of the pharmaceutical companies, such as Pfizer, GlaxoSmithKline, Novartis and others, look at on a regular basis.
Inlicensing is a partnership that develops between two companies that have shared intentions, objectives or fields of interest. In the case of pharmaceutical companies, these goals may be the research and development of a product, or perhaps its distribution. Licensing is so popular because it allows you to use each company’s expertise in a very beneficial way. Additionally, profit sharing between the two companies can be a very lucrative investment.
If Pfizer, for example, needed help developing a new cancer drug, it could approach a smaller, lesser-known research company and ask what they can help. If the other company believes there may be a mutually beneficial arrangement, the two can enter into an inlicensing agreement. Pfizer can help by providing facilities, other experts, materials and money. The other company will contribute by providing some equity capital, as will the researchers.
When the final drug is developed, tested, and on the market, the companies will share in the profits of the enterprise through the terms set out in the licensing agreement. In some cases, this agreement may lapse after a period of time, allowing one company to retain full license fees for a time, but ensuring that the other company is able to recoup its investment, plus some additional salaries. If a product is never developed and brought to market, then the licensing agreement is that both share the loss.
In other cases, a licensing agreement may be entered into with a pharmaceutical company for distribution in foreign countries. It is possible that the pharmaceutical company with the rights to the drug does not have the network set up to successfully introduce the product in a particular country. Building that network would take time and resources, both of which cost money. Instead, it might be better to let a different company handle the distribution. The drug can be marketed under either company’s name, under the licensing agreement, and both share premiums.
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