The importance and structure of licensing term sheets in pharma/biotech

In the dynamic landscape of business agreements in the pharma/biotech world, the term sheet serves as a crucial preliminary document, streamlining negotiations, saving time, and minimising legal expenses. 

In this article, CELforPharma faculty member Dr. Carlos Velez , CELforPharma faculty member of Business Development & Licensing Course For Pharma & Biotech, delves into the rationale behind the utilisation of term sheets, emphasising their role in facilitating efficient and effective contractual processes. 
 

Why Bother with a Term Sheet?

➤ Term Sheets Save Legal Expenses

In the realm of business transactions, legal expenses can accumulate rapidly. Term sheets act as cost-effective tools by outlining essential terms and conditions upfront. This preliminary document serves as a guide for legal teams, allowing them to focus their efforts on drafting the final agreement efficiently. The non-binding nature of term sheets ensures that the commitment threshold remains low, granting flexibility during negotiations. Parties can explore potential collaborations without being legally tied to the agreement until the final document is executed.
 

➤ Term Sheets Save Time

Time is of the essence in business negotiations. Term sheets expedite the process by providing a concise overview of essential terms. Although negotiations continue post-term sheet, this document acts as a foundation, significantly reducing the time required for the final contract. With a typical length of 3-5 pages, term sheets streamline communication and decision-making, involving fewer stakeholders. This enables companies to reach a settled term sheet before delving into deeper due diligence, ensuring a more focused and efficient due diligence process.
 

Structure of Licensing Term Sheets

➤ General Term Sheet Anatomy
 

1. General:
    
   1. Clearly outlines the two parties involved and specifies the assets under consideration, whether related to clinical, manufacturing, or commercialisation activities.
       
   2. It also outlines the specific activities each party will undertake, providing a comprehensive overview of responsibilities without delving into financial details. 
       
   3. This section basically says: “Which party will perform which specific activity”.
       

2. Financial Terms:

   This section outlines crucial financial aspects such as upfront payments, milestone achievements, royalties, and other relevant financial considerations.
    

3. Additional Elements:

   The term sheet may include a preamble emphasising the non-binding nature of the document and potentially set an expiration date to ensure timeliness and relevance.
    

➤ Important remarks on Licensing Term Sheets

• Engage Experienced Attorneys:

  While the initial term sheet can be as simple as an email, it is crucial to collaborate with experienced attorneys for the refinement and finalisation of the document.
   

• Valuation Considerations:

  Changes to the term sheet during negotiations can have a significant impact on the valuation. Therefore they must be carefully evaluated, especially concerning upfront payments, milestones, royalties, and alterations to the development plan.
   

• Flexibility for Change:

  Always recognise that a term sheet serves as an outline, and changes may occur during the contracting phase. Parties must remain flexible and adaptable to evolving circumstances and potential changes in decision-makers' perspectives.

In conclusion, licensing term sheets play a pivotal role in the negotiation and formation of business agreements. Their ability to save legal expenses, streamline negotiations, and expedite the contracting process makes them indispensable tools in the realm of commercial collaborations. While a term sheet sets the stage, parties should remain vigilant, recognising its dynamic nature and the potential for adjustments as negotiations progress toward final contract execution.