Over the past few years, more and more Chinese pharmaceutical companies have been seeking innovative drugs overseas to expand their research and development pipelines because of the increasing requirements of Chinese pharmaceutical market and the rapid development of global pharmaceutical market. According to industry reports, nearly 90 types of innovative drugs were licensed to Chinese pharmaceutical companies from overseas in the last decade (2007-2017). From 2008 to 2012, there were 10 transaction cases between international drug firms and Chinese pharmaceutical companies. Besides, the figure has significantly increased since 2013 to more than 70 during 2013-2017.

Considering that international licensing of patents and related technologies are the crucial foundation of the whole transactions, as a licensor, overseas companies might need to pay closer attention to the following issues.

Structure and Organization

It is necessary for foreign enterprises to apply for relevant patents in China before licensing their innovative medicine technology to Chinese pharmaceutical companies. Patent layout of certain drug products from the overall strategic level and construction of high-quality patent portfolios are key factors for licensing. Generally speaking, the layout of the patent includes two aspects. One is the layout of the target market, such as the Chinese mainland, the Greater China including Hong Kong, Macao and Taiwan. Another is the layout of patent technology itself. Chinese pharmaceutical patents include new compounds, new preparation methods, new pharmaceutical preparations, new uses, new natural drug extracts, new biotech drugs and genetic engineering drugs, and related technologies and methods. Patent applications could be gradually implemented at various stages of drug development to form patent portfolios. For example, even though the core patents (involving pharmaceutical composition) of Novartis’s original drug in China were successfully ineffective by Shanghai Xuantai Haien Pharmaceutical recently, they still own other related patents and patent applications for this product (involving the preparation of solid composites). So it is still difficult for domestic pharmaceutical companies to imitate their products. It shows that a strict patent layout of drug products or technologies has a strong defensive effect on preventing competitors from being copied or invalidated.

In addition, considering that there might be other companies who have made patent layout in related products in China, foreign companies should conduct "mine-sweeping" infringement analysis before entering the Chinese market. Once they find a similar patent, they should analyse the protection scope of the claims and come up with new patent applications which could prevent the defendant from infringing. This could help them avoid unnecessary troubles.

Licensing strategy

In general, in terms of licensing strategy, the main considerations include the type of license (exclusive license and non-exclusive license), license fee and its calculation basis, the territory (certain countries or global), scope, time limit, etc. Among them, in the field of medicine, it is more important to pay closer attention to the timing of licensing, collection method of license fee and the scope of license.

In pharmaceuticals, the timing of IP licensing is essential. It usually takes around 10 years to get a new drug approval because of the length of drug development phase (including the discovery and screening of new drugs, clinical Phase I-III trials, new drug applications and listings, and clinical IV after drug marketing). There are risks of failure in each stage, so technologies with high maturity usually could have a better price than those in early stage due to the huge investment and relatively low risk. It means that a foreign company needs to consider the timing of licensing when planning to license their technology to a Chinese company. An overseas company could get paid earlier if they choose to license at an early stage of the drug discovery while the royalty might be much less than the relatively mature technology. Whereas, if the company plans to license in the clinical phase or more mature product phase, they need to invest more but could get much higher returns in the future. Enterprises could choose “short-term realization” or “long-term holding” strategies according to their own situation and the target market or the target partner.

The license fees in pharmaceutical field include the upfront fee, milestone payment and sales commission based on a certain percentage. The license fees are usually associated with research and development costs and some incidental expenses. The influence factors on pricing include the type of the drug, the research and development stage, the target market, the type of license, etc. It is important to note that, the foreign company who acts as the licensor should be aware of the risk of only taking back part of the license fee when they adopt the milestone payment. In this case, it would be better for the foreign company to license their patents together with the know-how. On one hand, they could charge service fees by providing consulting and technical support for Chinese licensees. On the other hand, it would push the cooperation between both parties and achieve win-win cooperation finally. Furthermore, the foreign licensor should pay attention to the clauses related to the abuse of patent right in agreement, in case that the licensee refuse to pay the license fees.

The scope of the license is also need to be considered due to the breadth and complexity of pharmaceutical segmentation application market. The licensor could make license strategy according to application area or market, such as licensing a Chinese licensee the rights of development, production and commercialization in certain treatment indication in certain target market. Thus, the licensees would only get limited license area which could maximize the interest of the licensor. For instance, Celgene obtained the development rights of Baekje Shenzhou BGB-A317 in solid tumors outside Asia (excluding Japan) in 2017, but didn’t get the rights of developing BGB-A317 in the global blood tumor field, as well as in other parts of Asia (other than Japan) which are retained by Baekje Shenzhou itself.

Technical improvement

The rights of technical improvements and the relevant Chinese legal provisions are also important factors. Foreign companies should evade related risks, such as the definition of "improvement" in the agreement, which has improved intellectual property rights, and whether the opposite party has the right to use the improvement. Those provisions could be found in “Regulations of the People’s Republic of China on Administration of Import and Export of Technologies” and “Contract Law” in China.

According to Regulations of the People’s Republic of China on Administration of Import and Export of Technologies (article 24 clause 3), where the receiving party to a technology import contract infringes another person's lawful rights and interests by using the technology supplied by the supplying party, the supplying party shall bear the liability therefore; (article 27) within the term of validity of a contract for technology import, an achievement made in improving the technology concerned belongs to the party making the improvement.

However, in practice, this issue is usually solved in regard to the “Contract Law”. Article 353, where the exploitation of the patent or the use of the technical secret by the transferee in accordance with the contract infringes on the lawful interests of any other person, the liability shall be borne by the transferor, except as otherwise agreed upon by the parties. Article 354, the parties may, on the basis of mutual benefit, provide in the technology transfer contract for the method of sharing any subsequent improvement resulting from the exploitation of the patent or use of the technical secret.

Therefore, foreign companies could protect their rights and interests by signing the agreement which is benefit them according to those clauses.

Stop in time

Foreign licensors should also consider whether the licensees have the ability to achieve the expected results as there are many risks such as huge investments in the early stage, other uncontrollable factors in the pharmaceutical research and development projects. Take the pharmaceutical field; the licensor should add appropriate clauses in the agreement to ensure that the licensees would work hard if the licensees are incapable of advancing drug development to the next stage or failing to realize the benefits on time. Asking the licensees to submit reports on a regular basis, keeping the original account records as well as holding the right to inspect and audit it are necessary strategies. Also, in order to minimize its own potential losses, the licensor need to integrate the payment method and exit strategy into the whole license plan.

Dispute resolution

Although both parties might have a good vision of win-win cooperation at the beginning, dispute resolution should be considered in cross-border licensing. It is necessary to state the solution of some controversial issues, such as dispute resolution (litigation or arbitration), application law, and jurisdiction of the court.

When it comes to choosing arbitration, it would be better to agree to choose a neutral country or region. If both parties agree to choose litigation, the law applicable to the place where the agreement is signed, the location of each party or the place where the agreement is enforced is generally the choice.

When it comes to being infringed by a third party, it is necessary to stipulate who is responsible for responding; in turn, when a third party enterprise is found to be infringing, who will sue. Also, it should be agreed in the agreement that who will bear the cost of litigation and how to distribute it between the parties if damages are awarded.

Overall, during the process of cross-border licensing, foreign companies need to build up their own high-quality and stable patent portfolios, and formulate appropriate licensing strategies as well as indentify potential risks and establish corresponding preventive measures to increase to possibility of successful licensing.