In the first half of 2026, the total transaction value of China’s innovative drug BD outbound deals reached $99.7 billion. Among them, three deals worth over $10 billion are particularly noteworthy: the $18.5 billion partnership between CSPC Pharmaceutical Group and AstraZeneca, the $15.2 billion strategic collaboration between Hengrui Medicine and Bristol Myers Squibb, and the $10.5 billion partnership between Innovent Biologics and Pfizer.

The commonality among these multi-billion dollar deals is that the drug registration certificates and MAH status remain unchanged; what changes are the licensing rights for R&D and commercialization.

Behind a multi-billion dollar deal, what exactly is being licensed in a drug license?

Simply put, a license grants the right to use intellectual property, R&D data, and technical materials without transferring the ownership of the drug itself. The licensor retains ownership, while the licensee gains the rights to R&D, registration, production, and sales within a specific region, field, and timeframe, in exchange for licensing fees and commercial royalties.

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I. Differences in transaction targets across different R&D stages

Drug licensing is the most common form of pharmaceutical business development. Since China implemented the Marketing Authorization Holder (MAH) system, marketing authorization and production licensing have been managed separately, allowing asset-light R&D companies to obtain drug marketing authorizations. Given the long R&D cycle, high investment, and low success rate of drug development, it is difficult for a single company to cover the entire process from R&D to commercialization, making licensing transactions a standard practice in the industry.

To understand licensing transactions, you must first determine at which stage the transaction occurs—Different stages involve different tradable assets, and the risk allocation methods for trading also differ.

From R&D to market launch, drugs undergo drug discovery, pharmaceutical research, preclinical studies, clinical trials, marketing authorization registration, production, and commercial sales. Licensing transactions can be conducted at every stage.

The closer drug R&D gets to market launch, the more assets can be brought to the table for licensing.

Preclinical stage，The transaction assets mainly consist of intellectual property, research data, and R&D materials.

Clinical trial stage,Upon entering the clinical trial stage, the licensee usually also requires that the clinical data and any subsequent intellectual property generated be included in the scope of the transaction. If permitted by regulations, both parties may also change the clinical trial sponsor, with the licensee taking over the clinical trials to facilitate subsequent localized arrangements for registration and marketing.

Drug registration application review stage,The licensor has submitted a complete set of application documents to the regulatory authorities, covering product-related intellectual property and data materials related to the registration application. Taking China as an example, during the review period of a marketing authorization application for drugs, an application can be made to change the drug registration applicant, allowing the licensee to apply to become the marketing authorization holder of the drug.

The drug has obtained marketing authorization.，The core of the transaction has shifted to commercial cooperation. China’s MAH system allows for the direct transfer of drug marketing authorizations, but such a transfer does not take effect simply by signing a contract—it requires regulatory approval, and after the transfer, it must pass a GMP compliance inspection and meet product release requirements before it can be marketed and sold.

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II. Licensing Terms: The Foundation and Scope of the Transaction

Licensing terms are the most core provisions in pharmaceutical licensing transactions, defining the foundation and scope of the cooperation. They generally include basic elements such as licensed product information, licensing method, licensing field, licensing territory, and licensing term.

The exclusivity of a license is divided into three categories: exclusive license, sole license, and non-exclusive license:

Exclusive licenseis the most restrictive form of exclusivity,where the licensee obtains complete market exclusivity—within the licensed territory, only the licensee can research, develop, manufacture, and sell the product; the licensor itself cannot do so, nor can it grant rights to any third party. Under this model, the licensee bears the greatest commercial risk, and therefore the consideration is also the highest.

Under an exclusive license, the licensor may use the licensed rights themselves, but cannot sub-license the same rights to a third party.The licensee obtains an “exclusive of the licensor” status, which faces slightly more competitive pressure than an sole license, but the consideration is usually lower as well.

Non-exclusive licenses have the weakest exclusivity—the licensor can use the technology themselves and simultaneously grant licenses to multiple parties.The licensee does not obtain exclusive rights, but rather a “non-exclusive right to use.” Under this model, the licensee must compete with the licensor and other licensees, resulting in the lowest consideration, but the licensor can generate higher total revenue through multiple licenses.

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III. Financial Terms: The Logic of Phased Payments

Financial terms are the core terms in pharmaceutical licensing transactions,primarily stipulating the licensing fees.

The process from drug R&D to commercialization is long and highly uncertain, so licensing fees are typically paid in stages.Common types include upfront payments, milestone payments, and sales royalties,Payment methods usually involve cash and/or a certain percentage of the licensee’s equity.

Upfront paymentIt corresponds to the value recognition at the time of signing.This money buys the “right to enter the transaction”—the licensor hands over intellectual property, data, and materials to the licensee, and the licensee gains the rights to subsequent R&D and commercialization.Regardless of the success or failure of subsequent R&D, the upfront payment is usually non-refundable,because the licensor has already incurred R&D costs and opportunity costs. For the licensor, the upfront payment is a guarantee to lock in the deal and cover initial investments; for the licensee, it is a sunk cost that must be borne, and the amount directly determines the extent of the loss if the project fails.

Milestone PaymentsThese correspond to key R&D and approval milestones。From preclinical to market launch, there are multiple high-risk and high-uncertainty stages—IND approval, completion of Phase I clinical trials, Phase II clinical data readout, successful Phase III clinical trials, NDA submission, and marketing authorization.Each milestone carries the risk of failure; if a milestone is not met, subsequent milestones will not be triggered.This structure shifts most of the consideration to stages with higher certainty: the licensee only pays when the project achieves substantial progress, while the licensor shares in the project’s value appreciation through the milestone amounts. The negotiation focus of milestone clauses typically revolves around “which events constitute milestones,” “the payment amount for each milestone,” and “how to handle delayed or partially achieved events.”

Sales RoyaltiesThis corresponds to the continuous revenue generated after commercial success.After the drug is launched on the market, the licensee pays royalties to the licensor based on a certain percentage of net sales. The negotiation focus of sales royalties includes: the royalty rate, the definition of net sales (whether to deduct medical insurance discounts, returns, and taxes), the royalty term (usually until patent expiration or the end of the data protection period), and whether to set tiered royalties (higher or lower royalty rates as sales volume increases). The significance of sales royalties lies inthat the licensor does not sell out the rights in a one-time lump sum, but continuously shares the revenue from the product’s success; meanwhile, the licensee does not need to pay a high upfront consideration before the product becomes profitable, resulting in less cash flow pressure.

The combination of three payment types essentially links the transaction consideration to the project’s progress—The earlier payments are more certain, while the later payments depend more on actual results。The licensor prefers a high upfront payment and loose milestone triggers, whereas the licensee prefers a low upfront payment and milestone amounts strictly tied to R&D progress. The core of the negotiation between the two parties is often not the total amount, but the allocation ratio between the upfront payment and the milestones.

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IV. Intellectual Property Clauses

Intellectual property is the core subject matter of the licensing transaction. Whether the ownership of the licensed IP is clear and free of potential disputes directly affects the core interests of both parties.

(I) Regarding the definition of intellectual property，The definition and scope of intellectual property rights should be clearly specified in the agreement, and important intellectual property rights should be defined separately.

(II) Regarding the division of ownership,Intellectual property in pharmaceutical BD transactions is typically divided into background IP and foreground IP:

Background IPRefers to the technical achievements owned by each party prior to the signing of the agreement, which are usually owned by each party respectively;

Foreground IPNew technical achievements generated by one or both parties during the performance of the agreement shall be owned as agreed upon based on the circumstances:

(1) The jointly developed technology shall be jointly owned and used by both parties;

(2) Independently developed technologies shall be owned by each party respectively, but mutually licensed for use for the purpose of cooperation;

(3) For intellectual property rights generated by one party based on existing technology, the other party may request a right of first refusal.

(III) Regarding Representations and Warranties clauses，The core is to resolve the issue of “whether the licensor has the right to authorize”.

The Licensor must guarantee that:

(1) First, it is the sole and exclusive owner of the licensed intellectual property, possessing full control;

(2) Second, it possesses complete legal rights and authorization qualifications to grant all licensing rights agreed upon in the agreement.

If the Licensor has pledged the subject patent to a creditor for financing, the creditor will have the right to dispose of the patent in the event of a debt default, which will directly impact the Licensee’s licensing rights.Meanwhile, this clause requires the Licensor to confirm that there is no infringement of the licensed intellectual property by any third party—large-scale imitation or use of the relevant patented technology by third parties will directly affect the commercial value of the license.

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V. Termination Clauses

Termination clauses are often overlooked but extremely important in pharmaceutical licensing transactions. In addition to standard scenarios such as termination for breach of contract or bankruptcy, license-in transactions also include unique circumstances, such as the right of both parties to terminate the agreement if the drug fails to obtain marketing authorization by a specific milestone.

As the primary payer, the licensee generally requires more scenarios for unilateral termination, such as the licensor’s failure to complete technology transfer, the core patent expiring or being declared invalid before a certain deadline, or the production and sale of the licensed product infringing on third-party intellectual property rights.

The key to termination clauses lies inarrangements after termination. Specifically, several issues need to be clarified in the agreement:

First, how to handle the payments already made.Down payments are usually non-refundable. For milestone payments already made, it depends on whether the corresponding milestone has been completed. If the termination is due to a breach of contract by the licensor, the licensee may request a refund of a portion of the payments made.

Second, how to handle inventory and stock.After the termination of the agreement, the licensee may still have produced inventory or products currently in production. Whether they are allowed to continue selling them during the transition period or are required to destroy all of them must be agreed upon in advance.

Third, the return or retention of technical materials and data. The licensor typically requires the licensee to return all technical materials and data; the licensee may request to retain certain data for subsequent regulatory filings or product handovers.

Fourth, sublicensing and third-party arrangements.If the licensee has already granted sublicenses, whether those sublicenses remain valid after termination must be coordinated with the termination provisions of the main license.

Fifth, the post-termination transition period.Fromthe termination notice to the formal termination, a transition period is usually required to allow both parties to complete the handover. The duration of the transition period and the obligations during this period also need to be clearly defined.

The 2026 market also serves as a reminder of the existence of termination risks. Core reasons for the termination of collaborations include clinical data failing to meet expectations and strategic adjustments by multinational pharmaceutical companies.Termination clauses are the last resort, but risk management in licensing deals goes beyond termination clauses—it spans the pre-signing, signing, and post-signing phases.

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VI. Conclusion

The clause design in pharmaceutical licensing transactions essentially answers one question:What should both parties do if things do not go as expected?

R&D failure, patent invalidation, registration rejection, and partner bankruptcy—none of these are low-probability events. Every core clause in a licensing agreement is designed to pre-set handling procedures for these scenarios. Exclusivity defines the licensee’s safe market boundaries, milestone payments determine how much loss each party bears if the project fails, representations and warranties dictate whether the licensor must compensate for defects in rights, and termination clauses outline how to exit when the partnership cannot proceed.

Therefore, judging whether a licensing agreement is good is not about how comprehensive it is written, but whether it remains enforceable under adverse conditions.Pre-signing due diligence determines whether a deal can be made, the terms at signing determine how well the deal is executed, and post-signing management determines whether the deal can be sustained.Only when these three aspects are properly handled can a transaction stand the test of time.

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