As big pharmas and other commercial-stage biopharma and biotech companies grapple with the reality of patent cliffs on the horizon, which have been projected to lead to $180 billion in lost revenue in 2027 and 2028,[1] these companies, or acquirers, continue to look toward acquisitions to stabilize their profits and replenish their pipelines.
This, among other factors, has led to a relatively robust year of merger and acquisition activity thus far in the sector. According to DealForma, biopharma companies completed 26 M&A transactions in the second quarter — trending up from 24 in the first quarter — with the average deal size at $1.4 billion.[2]
When acquirers assess these potential acquisition opportunities, a key focus in due diligence will be any license and collaboration agreements pursuant to which the target company grants a third party the right to develop and commercialize products that are covered by the target's technology.
License and collaboration agreements can be relatively straightforward, such as where the licensee takes over all operational responsibility for the licensed programs upon the deal closing, or more complex, such as where the parties leverage their respective technologies to identify early-stage products.
Targets enter into license and collaboration agreements for a number of reasons, including because they are a source of nondilutive funding, an effective means to demonstrate proof of concept of their technology, and a signal to the market that they have technology which is of interest to established companies in the space.
While many aspects of the agreements will be of interest to an acquirer, a key focus will be any noncompete restriction that limits the target's ability to engage in related activities outside the scope of the license and collaboration agreement, which is a noncompete.
Noncompetes are commonly agreed to by targets, or licensors in the agreements, because licensees view them as a critical way to protect the benefit of their bargain — that is, to ensure the licensor does not pursue programs outside of the agreement that compete with the program licensed under the agreement, thereby undermining the value of the program for which the licensee paid.[3]
Although acquirers will not be surprised to see a nonompete applicable to a target-licensor when reviewing an agreement, they will be keenly focused on such provisions — and particularly the features of such provisions described below — if they will have to live with them after acquiring the target.
On that point, the licensor typically will not have an at-will, or convenience, termination right under the agreement and thus will not be able to freely extricate itself from a noncompete as part of an M&A exit.
This article will identify key features of noncompetes that will be of interest to acquirers, explain the perspectives that licensors and licensees bring to the table when negotiating the relevant provisions, and propose strategies intended to help contracting parties protect their interests under their license and collaboration agreement while not adversely affecting a potential M&A exit by the licensor-target.
Noncompete Duration and Scope
As with any contractual provision, licensors and licensees should be as clear as possible when drafting a noncompete, with a particular focus on its duration and scope.
Where licensors agree to a noncompete, they should push for it to be as narrow and short as possible, not only to ensure the provision is not a poison pill for potential acquirers but also to preserve flexibility to leverage their technology and operate their business.
By avoiding restricting, as much as possible, their ability to pursue internal programs and other partnering opportunities, licensors can retain the potential of growing into companies with diversified and de-risked assets.
Thus, licensors enhance their prospects of raising money, attracting other strategic partners and advancing products into the clinic and onto the commercial market — and ultimately maximizing their value in a potential M&A exit.
Licensees, on the other hand, will seek for the noncompete to have sufficient breadth and length such that it protects the benefit of their bargain. Importantly, for a noncompete to serve this purpose, it needs to be enforceable.
Acquirers, like licensors, will obviously prefer a noncompete's scope to be narrow and its duration to be short, but perhaps more importantly the acquirer will need to be able to precisely assess what it can do — and cannot do — at the target level or potentially throughout its affiliated group following the acquisition.
If the metes and bounds of the noncompete are not clear, acquirers may interpret them more broadly than the contracting parties intended, thereby chilling the target's potential M&A exit.
For example, a nonompete restricting a target from developing or commercializing a product that is directed to a specific antigen may create ambiguity — for instance, it may be read to capture any product with affinity to the antigen, even if not therapeutically relevant.
If an acquirer is currently developing or commercializing any such product or plans to do so in the future, this could have a negative impact on how it evaluates the potential acquisition.
A more precise formulation might instead specify the relative affinity the product must have for the specific antigen as compared to other antigens, or require the product to exert its primary therapeutic benefit as a result of modulating the relevant antigen.
Application of Noncompete to Acquirers
Noncompetes in license and collaboration agreements are almost universally drafted to restrict not only the activities of a given party, but also those of its affiliates.
Licensees will push for nonompetes to apply to the licensor's affiliates to avoid the possibility of the licensor easily circumventing the provision merely by having other entities in its affiliated group perform the restricted activities, and licensors typically will not object given that result would clearly undermine the provision's intent.
Since the composition of a company's affiliated group will change during the term of a license and collaboration agreement — for example, through corporate restructurings or, relevant here, M&A activity — licensors and licensees should expressly address whether an entity that becomes an affiliate of a party subject to a nonconmpete after the agreement becomes effective is considered an affiliate of such party and is therefore subject to the noncompete.
Contracting parties may assume that such an entity would be considered an affiliate for the purposes of the noncompete — otherwise, a new entity could be established in the restricted party's affiliated group one day after the agreement becomes effective and fall outside its scope.
However, it is prudent to be express on the point; otherwise, different rules will apply depending on the governing law of the agreement.
For instance, under New York law, there is a strong presumption that the scope of affiliates is frozen at the time an agreement is signed absent language to the contrary.
Safe Harbors From Noncompetes for Acquirer Programs
Noncompetes will often include language, commonly referred to as a safe harbor, providing that certain activities that would otherwise breach the noncompete are not restricted by the clause.
For example, assuming the noncompete restricts the activities of the restricted party's affiliates, the agreement will often contain a safe harbor that carves out from the noncompete's scope certain activities conducted by the acquirer and its affiliates other than the Target and its affiliates as of immediately prior to the consummation of the M&A transaction — an acquirer safe harbor.
Licensors should push for an acquirer safe harbor to avoid agreeing to a poison pill that may negatively affect its potential M&A exit — in particular, the situation where a potential acquirer is interested in acquiring the target, but in doing so would become subject to a noncompete restricting the acquirer from pursuing other programs in areas where the acquirer is already operating or may want to operate in the future.
Faced with this choice, the acquirer may decline to proceed with the acquisition or reduce the purchase price to account for the loss in value attributable to becoming subject to these restrictions.
Licensees will often agree to address the licensor's concern here but will focus on ensuring the parties' resources cannot be leveraged to support the competing program — in particular, that:
- The IP and data related to the licensed program, as well as the licensee's own IP and confidential information, is not used by the acquirer in connection with its competitive program; and
- The licensor's personnel does not work on the acquirer's competitive program.
The acquirer safe harbor will typically condition the acquirer's ability to continue pursuing a competitive program upon complying with these so-called firewalling obligations.
Many acquirers will be familiar with such firewalling obligations and may have well-established procedures in place, and operational teams of sufficient size, to comply with them with relative ease.
When reviewing an acquirer safe harbor, acquirers will also focus on if it applies only to competitive programs being pursued by the acquirer at the time of the acquisition, or if it also applies to such programs that are initiated, acquired or in-licensed by the acquirer following the acquisition.
An acquirer will obviously prefer being free to pursue opportunities in the restricted space that arise pre- or post-acquisition so long as it complies with the relevant conditions of the acquirer safe harbor — i.e., firewalling.
As such, licensors seeking to remain as attractive as possible for an M&A exit are well advised to push for the broader flavor of the acquirer safe harbor.
That said, it may be challenging for a licensee to agree to such breadth — it's one thing to grandfather in an acquirer's known, existing programs at the time it acquires the licensor, but it can be another thing entirely to permit the acquirer to pursue a potentially indefinite number of future competitive programs that could undermine the benefit of the licensee's bargain.
Conclusion
For the reasons described above, licensors and licensees who come to the negotiation table mindful of these points will be well positioned to agree on noncompetes that ensure the parties' respective objectives are met and that their incentives are aligned, both under their collaboration and beyond.
**Note: this article originally ran in Law360
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[1] See "The looming 'patent cliff' facing Big Pharma," published by Financial Times on July 9, 2025 and available at https://www.ft.com/content/360cb65b-a9ab-4fed-b8b3-7c34f2560938.
[2] See "Biopharma Therapeutics and Platforms M&A - Q2 2025 Review," published by DealForma on July 29, 2025 and available at https://dealforma.com/biopharma-therapeutics-and-platforms-ma-q2-2025-review/.
[3] Licensees will also sometimes agree to Non-Competes in L&C Agreements—for example, in so-called co-development/co-commercialization ("co/co") agreements; where there is significant competition for the relevant program; or where the program represents the licensee's only "shot on goal" in the space—though it is much less common than a licensor doing so. Accordingly, this article focuses on Non-Competes agreed to by Targets/licensors.