Abstract
The Option-to-License structure enables Pharma to lock in high-potential assets at relatively low cost and mitigate risks when partnering with Biotech on early-stage programs. Yet this model frequently leaves Biotech at a disadvantage: they bear the full investment and high risks of early-stage R&D, while facing uncertainty over whether the Pharma partner will ultimately exercise the Option.
A significant share of Options are never exercised. Poor scientific data is not the only cause; non-scientific factors—including strategic shifts, mergers, acquisitions, and restructurings of Pharma—often lead to non-exercise. These non-scientific drivers can materially harm a Biotech’s valuation and day-to-day operations.
To break out of this passive position, Biotech must build in safeguards upfront during the drafting and negotiation of contractual terms, and put in place robust rights protection and remedy mechanisms.
Introduction
In recent years, the Option-to-License model has become widespread in partnerships between biotech companies (“Biotech”) and large pharmaceutical companies (“Pharma”). It is especially common in transactions involving early-stage pipeline assets (preclinical through Phase I), where its use is substantial and rising. As global Pharma giants increasingly scout for assets in China, the Option model has emerged as a leading structure for Chinese Biotech to partner internationally on early-stage programs.
In the following are some typical overseas Option transactions involving Chinese Biotech:
Case 1: Biocytogen × Radiance Biopharma (January 2024)
Indication: Oncology (HER2/TROP2 bispecific antibody–drug conjugate [ADC])
Key Terms: The parties entered into an exclusive Option and license agreement, granting Radiance the global exclusive Option to Biocytogen’s first-in-class fully human HER2/TROP2 bispecific ADC. The exercise decision will be made following delivery of the data package. Upon exercise, Radiance will obtain global development, manufacturing, and commercialization rights, triggering an Option exercise fee, milestone payments, and single-digit royalties on net sales.
Case 2: Simcere Zaiming × AbbVie (January 2025)
Indication: Relapsed/refractory multiple myeloma (GPRC5D×BCMA×CD3 trispecific antibody SIM0500)
Key Terms: AbbVie was granted an Option to license SIM0500 outside Greater China. The exercise decision will be made following availability of Phase I clinical data. Potential Option exercise fees and milestones total up to $1.055 billion. Simcere Zaiming will also receive tiered royalties on net sales outside Greater China.
Case 3: Kelun-Biotech × Merck & Co., Inc. (December 2022)
Indication: Oncology (seven preclinical ADCs against diverse targets, including TROP2 and CLDN18.2)
Key Terms: Kelun-Biotech granted Merck global exclusive licenses or exclusive Options for seven programs, with a US$175 million upfront payment and a potential milestone of up to US$9.3 billion. Merck must decide whether to exercise the Option for each program upon validation of early clinical data. (In October 2023, Merck announced it would waive the exclusive Option for one preclinical program.)
What Is the Option-to-License Model?
Under the Option model, the Licensee (typically Pharma, the in-licensing party) pays the Licensor (typically Biotech, the out-licensing party) a relatively modest Option fee to lock up the target pipeline asset for an agreed period before finalizing a full license. Once agreed conditions are met, the Pharma partner decides whether to exercise the Option. If exercised, the Pharma gains rights to develop and commercialize the asset.
Legally, the Option right held by Pharma is essentially an “option arrangement”: it locks in promising future assets at low cost while shifting the risks of early-stage R&D onto Biotech.
Why do Pharma favor the Option model? At its core, it is a de-risking strategy.
1. Addressing the looming patent cliff
Between 2025 and 2030, roughly US$300 billion of global prescription drug revenue will lose patent protection, three times the size of the previous round (about $100 billion in 2016). ). Taking AbbVie's blockbuster drug Humira as an example, after the drug patent expired, its annual sales plummeted from $21.2 billion in 2022 to about $9 billion in 2024, a drop of more than 60%. It is predicted that 2026 to 2028 will be the peak period of this round of patent cliff impact, driving urgent demand for external assets to refill Pharma pipelines.
2. Avoiding high early-stage R&D attrition
Industry statistics show that roughly 90% of preclinical molecules fail at toxicity or pharmacokinetic hurdles, and more than 50% of molecules entering Phase I are discontinued in safety testing. Faced with these steep failure rates, the Option model lets Pharma lock in promising assets with a modest Option fee and defer the go/no-go decision until key clinical data are available, sharply reducing sunk costs.
Critical Risk: What If the Option Is Not Exercised?
Industry practice shows a meaningful percentage of Options are ultimately not exercised. Non-exercise often stems not from unsatisfactory scientific data, but from non-scientific factors at the Pharma partner.
There are five common non-scientific reasons for non-exercise:
(1) Internal Pipeline Conflict: Pharma already has assets targeting the same target or indication; exercising would create internal competition, so in-house programs are prioritized.
(2) Strategic Restructuring: During the Option period, Pharma shifts its R&D focus, and the partnered program no longer fits its new strategy.
(3) Post-M&A Asset Reprioritization: After a major merger or acquisition, new management streamlines the pipeline and labels the partnered program “non-core.”
(4) Financial Constraints: The Option exercise fee and required follow-on investment exceed Pharma’s near-term budget.
(5) Departure of Internal Champion: The key Pharma leader driving the transaction leaves, and the project loses momentum.
To address these risks, Biotech must shift their mindset from passive waiting to strengthening the rights and obligations framework under the agreement, transforming a one-sided grant of rights into a reciprocal structure of mutual commitments and constraints.
The key for Biotech to gain control under the Option model is upfront safeguarding: systematically embedding rights protection and remedy mechanisms at the contractual drafting stage, converting ambiguous uncertainties—including exercise probability, development timeline and opportunity cost—into quantifiable and bounded commercial considerations, and achieving a structural balance of risk and reward.
Biotech Playbook: Nine Negotiation Priorities
Negotiation of contractual terms is critical for Biotech to gain the upper hand. The following nine points directly protect pipeline value and core business interests:
1. Define Clear Exercise Triggers to Avoid Ambiguity
It is important for Option agreements to clearly specify what triggers the exercise decision, which fall into two categories in practice:
Time-based: A fixed date (or a fixed number of days from the effective date of the agreement) is specified as the exercise deadline.
While simple, this structure can be misaligned with real-world R&D progress. For instance, delays in clinical trials due to slow enrollment or data analysis may cause the exercise deadline to expire before key data are generated, leading Pharma to walk away due to incomplete data.
Event-based: Directly tied to R&D milestones, which are more commonly used and reasonable in practice. Three typical triggers:
a) Data Package Delivery: Biotech submits a data package to Pharma, and Pharma shall make the exercise decision within an agreed review period.
b) Achievement of Proof of Concept: The asset meets the predefined scientific criteria (POC Criteria) in the agreed study, and Pharma shall make the exercise decision accordingly;
c) IND Submission: After filing an Investigational New Drug (IND) application, Pharma shall make the decision within an agreed period (commonly applicable to preclinical or early-stage development).
2. Specify Data Package Contents to Avoid a “Moving Target”
The data package is the primary basis for the exercise decision. Pharma may claim the package is incomplete or substandard to delay the exercise window and demand extra data.
In event-based structures, data package delivery is the most widespread trigger. Agreements typically split this into two milestones:
Interim Data Package: Submitted at a critical Phase I/II stage, including unblinded safety data in a pre-specified patient population, preliminary pharmacokinetic (PK) and pharmacodynamic (PD) analyses, and preliminary investigator-assessed objective response rate (ORR). It enables the Pharma to conduct a phased assessment and potentially abandon the Option and terminate the collaboration early if core data are unsatisfactory.
Final Data Package: Delivered after Phase II completion or POC, based on database lock. It includes the full Clinical Study Report (CSR) or topline summary, updated preclinical and toxicology reports, CMC manufacturing and stability data, and formal correspondence with regulatory authorities (FDA, NMPA, etc.). It serves as the primary basis for the Pharma’s final exercise decision.
The data package contents are core to negotiation, which should be listed item-by-item in an exhibit to define “completeness” and prevent disputes at the source.
3. Set a Hard Cap for the Option Period to Stop Endless Delays
To prevent Pharma from delaying exercise repeatedly by requesting supplemental data, the agreement should set a Hard Cap date, after which the Option right shall automatically expire.
If extensions are permitted, Biotech shall require Pharma to pay a non-refundable, non-creditable Extension Fee.
Sample Clause:
“The Option Period shall commence on the Effective Date and unequivocally expire upon the earlier of: (i) sixty (60) days following the Deemed Delivery of the Final Data Package, or (ii) December 31, 2027 (the "Hard Cap Date"). Under no circumstances shall the Option Period be extended beyond the Hard Cap Date without Licensor's prior written consent. If Licensee fails to deliver a written, unconditional Notice of Exercise to Licensor prior to the expiration of the Option Period, the Option shall automatically and irrevocably terminate, without requirement of further notice from Licensor.”
4. Add Mechanisms for Silent Inaction and Scientific Disputes
Two mechanisms are recommended to avoid deadlock and strengthen certainty:
(1) Deemed Delivery: After Biotech submits the data package, Pharma must raise specific written objections within a strict window (e.g., 15 days). Failure to object within such period shall constitute deemed completion of delivery, automatically triggering the exercise decision countdown.
(2) Expedited Scientific Dispute Resolution: Event-based triggers carry risks of ambiguous standard interpretation. The agreement shall therefore specify the evaluation body. For example, regarding the achievement of POC, in addition to the Joint Steering Committee (JSC), a binding expert determination procedure by independent third-party scientific experts may be introduced, with a 30-day deadline for a final decision to avoid time-consuming conventional arbitration.
5. Address Budget Overruns and Clarify Cost Sharing
If a Joint Steering Committee (JSC) is in place, Pharma may direct R&D (e.g., setting POC endpoints) through the JSC, leading to extended R&D timelines or increased costs.
Pursuant to the principle of matching rights and obligations, if Pharma materially influences or holds veto power over R&D, it shall bear or share the corresponding budget overrun risks.
In addition, the agreement shall specify the allocation of cost overruns resulting from slow clinical enrollment, repeated protocol revisions, or increased CRO fees to protect Biotech cash flow .
Sample Clause:
“The Parties have agreed upon a budget for the Option Activities (the "Approved Budget"). If the actual Out-of-Pocket Costs incurred by Licensor in conducting such activities exceed the Approved Budget by more than ten percent (10%) (the "Excess Costs"), and provided such Excess Costs are not caused by Licensor's gross negligence or willful misconduct, Licensee shall be obligated to reimburse Licensor for [e.g., 50% / 100%] of such Excess Costs within 30 days of invoice. Licensee's failure to fund such Excess Costs shall result in the immediate suspension or termination of the Option right.”
6. Lock Core Financial Terms Upfront—Leave No Open Items
Core financial terms effective upon exercise—including upfront payment, milestone payments and royalties—shall be fully agreed upon at the signing of the Option agreement, and shall not be left “To Be Negotiated” later. Otherwise, the release of positive clinical data will place Biotech in a weak bargaining position, exposing it to renegotiation and delay. Pre-locking financial terms protects Biotech and imposes reasonable discipline on the Pharma’s exercise decision.
7. Restrict Competitive Activity to Protect Confidential Data
During the partnership, Pharma gains access to Biotech’s core technologies and pipeline information. It is therefore essential to include non-compete provisions in the Option agreement to prevent Pharma from using that information to develop competing products in the event of non-exercise.
Sample Clause:
“During the Option Period and, in the event Licensee elects not to exercise the Option, for a period of eighteen (18) months thereafter, Licensee and its Affiliates agree that they shall not, independently or in collaboration with any Third Party, directly or indirectly research, develop, manufacture or commercialize any therapeutic compound or biological agent whose primary mechanism of action is directed to the [Specific Target] for the treatment of [Specific Field of Use / Indication].”
8. Ensure a “Clean Return” of Assets If the Option Is Declined
If Pharma chooses not to exercise, Biotech needs a clean exit to facilitate future partnerships without legal or commercial barriers. Particular attention shall be paid to the following two aspects:
(1) Commercial Reputation Protection: If non-exercise results from non-scientific causes such as pipeline restructuring or strategic realignment, the agreement should require a joint public statement clarifying the reasons to prevent market misinterpretation of technical defects, thereby preserving the commercial reputation and valuation of Biotech’s pipeline.
(2) IP Grant-Back: The Option agreement shall explicitly provide that, in the event of non-exercise, any new achievements, technological improvements or derivative intellectual property generated by Pharma during the collaboration (prior to non-exercise) shall be irrevocably granted back to Biotech at no cost.
The grant-back is critical for Biotech to protect its interests following non-exercise. Its core purpose is not merely formal IP restitution, but to ensure Biotech recovers full ownership of the asset—including peripheral patents, newly identified biomarkers and related improvements derived from joint data—thereby eliminating Freedom to Operate (FTO) barriers and preserving the ability to independently develop or re-partner the asset.
9. Change of Control: Build Two-Way Protection
Either side may face a Change of Control during the Option period. The agreement shall include bilateral protective provisions in advance:
(1) Pharma Change of Control: In the event of a merger or acquisition, the new controlling entity may lack interest in or strategic alignment with Biotech asset. The Option agreement shall require Pharma to make an exercise decision within a set period (“accelerated exercise deadline”); the Option shall expire automatically in the event of non-exercise.
(2) Biotech Change of Control: A third-party acquisition proposal may be impeded by the existing Option agreement. It is recommended to include a Buy-out Right, allowing Biotech to unilaterally terminate the Option agreement upon payment of an agreed break-up fee, preserving strategic flexibility for potential M&A transactions.
Conclusion: Three Core Pillars for Biotech Control
The fundamental risk of the Option-to-License model for Biotech is uncertainty during contract performance. The key for Biotech to secure control is to establish certainty through rigorous drafting across three dimensions:
(1) Time Certainty: Use Deemed Delivery and Hard Cap Date provisions to prevent procedural delays and ensure a predictable exercise timeline.
(2) Financial Certainty: Lock financial terms upfront and implement a budget overrun allocation mechanism to maintain stable cash flow.
(3) Asset Value Certainty: Remedy the asymmetry in collaboration dynamics, achieve mutual benefit upon exercise, ensure clean asset return upon non-exercise, eliminate competitive risks and IP disputes to enable future re-partnering.
In commercial negotiations, every “To Be Negotiated” gap tends to favor the stronger party. For Biotech, Option agreement risk management must be completed during the drafting and signing stages. Only through proactive, forward-looking contractual design can core business interests and the commercial value of pipeline assets be effectively protected.