License Compliance and Revenue Recovery
Life science and/or biotech companies may out-license IP as a way to generate additional revenue. However, statistics cited by major accounting and consulting firms indicate that reported royalties from licensees were incorrect in approximately 80% of investigations. Many license agreements include an audit provision, whereby the licensor has a periodic right to audit the records of the licensee. This provision typically entitles the licensor, in the event an underpayment is identified, to the costs of the audit (i.e., professional fees) and late fees.
For an organization that actively out-licenses its IP, a royalty audit can be an effective tool in recapturing revenue. A royalty audit can be performed in a variety of contexts. It can be done as part of a regular licensee-compliance program and/or prior to the sale of IP. Under the sale scenario, the increased cash flows associated with the IP may positively impact its selling price. Further, as an ancillary benefit, the increased cash flows recovered by royalty audits may assist the company in obtaining outside financing.
IP can play an important and central role in the turnaround of a distressed company. A necessary first step is to recognize that turnaround and bankruptcy are not bad words. The legal, financial, and economic issues surrounding IP can be complex. It requires a significant investment of time to understand the issues, the relevant legal guidance, and the economic theory underpinning the valuation and the licensing process.
Optimizing the use of IP requires an effective integration of law, economics, corporate finance, and turnaround/bankruptcy specialists. While the suggestions provided in this article only scratch the surface they, nonetheless, provide a good starting point for understanding the role of IP in distressed businesses.