CPT page on Royalties on patents for health care inventions

Ranges of royalty rates, and royalty guidelines

June 29-30, 2000, Michael Pegues, Protecting Patents, Trademarks, Copyrights: Remedies for Infringement This is a discussion of various approaches in the United States to set compensation for patents in litigation involving infringement. There are several examples given from recent cases.

1999, Paul L. Hickman, "The Patent and Technology License." This is a primer on patent licensing.

February 18, 1999, Rose Ann Dabek (Proctor and Gamble), The University of Dayton School of Law, Valuation Of A Technology. This is a survey of royalty rates for 12 industry catagories, including pharmaceuticals. The data for pharmaceuticals are:

    Distribution of Royalty Rates pharmaceutical patents
    (percent of reported royalty rates for in-licensing
        or out-licensing, for company or university)

Rate:        0-2%   2-5%   5-10%  10-15%  15-20% 20-25% >25%

in-license   23.6%  32.1%  29.3%  12.5%   1.1%   0.7%   0.7%

out-license  1.3%   20.7%  67.0%   8.7%   1.3%   0.7%   0.3%

February 2000, Richard D. Boltuck and David A. Riker, Charles River Associates, Estimating the Cost to PhRMA Member Companies Of Inadequate Intellectual Property Protection: A Study of Five Priority Countries and 20 Drug Markets.

"We have assumed that licensed foreign production generates a five percent royalty stream for PhRMA's member, which we understand to approximate the average pharmaceutical royalty rate."

1997, Richard H. Lilley, Jr., Licensing in Japan.

C. Japanese Government (JPO) Published Rates
In view of the recent government-sponsored technology transfer initiative proposals, it should be noted that the government (JPO) has previously announced guidance on reasonable patent royalty rates. The basic rate should be 2-4% of the selling price.(53) In addition to the basic rate determination, other considerations, such as the technology used, required investment prior to commercialization, potential for industrial growth, etc., may increase or decrease the actual negotiated rate.

52. See Kenichi Nakano, Clauses in Licensing Agreements, Dispute Resolution in Japan, Japanese Patent Practice Prosecution/Licensing/Litigation, AIPLA 311, 330 (Jun. 1994)(Based upon a Japan Intellectual Property Association survey of its corporate membership).
53. Ibid.

1998, Dr. Michael Gross, CASRIP Newsletter (V413), Germany, Actual Royalty Rates in Patent, Know-How and Computerprogram License Agreements This article discusses the "remuneration guidelines," from the German Law Relating to Inventions Made by Employees." These guidelines are:


Electronics      0.5  -  5 %
Machinery        0.33 - 10 %
Chemical         2    -  5 %
Pharmaceutical   2    - 10 %

The Philippines.

Guidelines on royalty payments.
Patents: Present law recognizes the possibility of compulsory licensing two years after registration of a patent with the Patent, Trademark and Technology Transfer Board, if the patented item is not being utilized in the Philippines on a commercial scale, or if domestic demand for the item is not being met to an "adequate extent and on reasonable terms." For pharmaceutical and food products, use, inadequate production for domestic demand, etc. need not be established. Royalty rates higher than five percent of net sales are allowed only in meritorious cases. Naturally occurring substances (plants or cells, for example) are not patentable.
REPUBLIC ACT NO. 8439, An Act Providing a Magna Carta for Scientists, Enginers, Researchers and other science and technology personnel in government.
(b) Share in royalties. - S & T scientists, engineers, researchers and other S & T personnel shall be entitled to receive share in royalties subject to guidelines of the Department. The share in royalties shall be on a sixty percent-forty percent (60%-40%) basis in favor of the Government and the personnel involved in the technology/ activity which has been produced or undertaken during the regular performance of their functions. For the purpose of this Act, share in royalties shall be defined as a share in the proceeds of royalty payments arising from patents, copyrights and other intellectual property rights;
If the researcher works with a private company and the program of activities to be undertaken has been mutually agreed upon by the parties concerned, any royalty arising therefrom shall be divided according to the equity share in the research project;

Daniel M. Putterman, 1996, Model Material Transfer Agreements for Equiable Biodversity Prospecting, first published in Colorado Journal of International Environmental Law & Policy (1996) [Volume 7(1):145-173].

Typical royalty rates on pharmaceutical drugs start at 0.5-3% for the supply of extracts which lead to commercial products, and increase as PROVIDER adds more value to transferred MATERIAL or INVENTIONS. At the top end of the scale, transferring INVENTIONS as purified compounds with data on efficacy (animal tests, or human safety evaluations) might command 10% royalties or higher.

1996, Bob H. Sotiriadis, Sophie Coret and Jacques Lemoine, Patents And Technology Transfers In a Biotechnolgy Context See Table 2, in particular.

Table 2 - Suggested Royalty Rates

 PRODUCT                     ROYALTY RATE
                      (share of net sales)

Research Reagents (e.g.      1% to  5%
expression vector, cell
culture, media supplements)

Diagnostic products (e.g.    1% to  5%
monoclonal antibodies,
DNA probes)

Therapeutic products (e.g.   5% to 10%
monoclonal antibodies,
cloned factors)

Vaccines                     5% to 10%
Animal health products       3% to  6%
Plant/agriculture products   3% to  5%

July 8, 1999, US Public Health Service, Centers for Disease Control and Prevention Policy, Statement on Cooperative Research and Development Agreements and Intellectual Property Licensing.

Royalty rates will be based on product sales and the rates conventionally granted in the field identified in the CRADA's research plan for inventions with reasonably similar commercialpotential. Royalty rates generally will not exceed a rate within the range of 5 - 8 % for exclusive commercialization licenses. Contingent royalty schemes based on, e.g., patent issuance or nonissuance, and clauses treating the stacking of royalties or packaging of other inventions developed under the CRADA may be provided.

Harold Meyer's March 1999 estimate of expected royalties on pharamceutcal patents, This was pretty informal, but probably as informed as several articles I have read. Pre-clinical stage - 2-3 percent, Phase II - 3-4 percent.

Government revenue from royalties

June 1999, GAO, Number and Characteristics of Inventions Licensed by Six Federal Agencies.

Sharing royalties

September 6, 2000, Richard Cox's survey of royalty sharing between inventors, departments, colleges, university, tech. development fund, research foundation, etc.

Royalty recipient       Average share   No. of
                                        responses

Inventors                     36.9%     12
Inventors department          20.9%      9
Inventors college             13%        2
Inventors research account    16.3%      2
University/institution        48.1%      4
Research foundation           33.8%      8
Tech development fund         16.7%      3

Federal employee share of patent income. "Royalty Income is paid to Federal employees through the successful licensing of patents and unpatented biologic materials to private industry. NIH employees can earn up to $100,000 a year in royalty income."

Additional discussion of cases where there are multiple patents on same product.

Sunday, 8 October 2000. Thomas J. Kowalski. Reach-through licensing: A US perspective, Journal of Commercial Biotech. (14 July 2000).
Avoiding a Court award of a reasonable royalty - trebled for wilful infringement - plus attorney fees (for both the drug developer and the patentee in litigating the matter) and a permanent injunction against making, using, selling or offering for sale the US$1bn per year drug, [5] ie the certainty of being able to proceed with development of the drug beyond the enabling technology, easily could be worth a reach-through royalty as low as 0.25-0.50 per cent (US$2.5-5m a year) or even as high 1-3 per cent (US$10-30m) on a US$1bn per year drug. Thus, a reach-through royalty licence arrangement can be justified.
Mouse Genomics and Genetics and compulsory licensing This is from an National Cancer Institute advisory group.
JOINT RECOMMENDATIONS: Mouse Genomics and Genetics Subgroup and Mouse Models of Human Cancers Subgroup
#1. In concert with the NIH at large, develop and implement political initiatives that set limits on reach-through royalty clauses on technology transfer agreements proffered by the holders of intellectual property, whether in academia or industry. Establish fair and just standards that appropriately reward the developers of new technology, while at the same time providing incentive for such tools to be used widely in biomedical research and in the development of new therapeutics.
i. Develop a solution to the restrictive Dupont patents for the 'oncomouse' and for the cre/lox technology.
ii. Investigate the 'Transgenic Mouse Patent' owned by DNX, which is being aggressively protected, to the extent that smaller biotech companies are stopping the development of transgenic mouse models.
iii. Establish a national standard (and intellectual principles) for compensation associated with the transfer of tools and technologies, including those associated with mouse models, as contrasted to discoveries of specific product candidates that need broad protection to justify their development.
created: 27sep95 Lorrie Smith revised: 31jan00
June 4, 1998, Naomi Freundlich, Will increasingly aggressive licensing terms on research tool patents hurt basic research? This story has a lot of interesting quotes. Here is one:
At Millennium Pharmaceuticals, Inc. in Cambridge, Mass., Chief Business Officer Steven Holtzman says that "We often find ourselves walking away from licensing-in tissue samples or other tools because the university OTL officer is insisting that if we ever develop a drug using the tool we have to pay a royalty." These royalties usually amount to between .5 percent and 3 percent for such tools as tissue samples, receptors and vectors. Holtzman, who is the one biotech participant in the seven-member NIH Working Group, figures that his company might assemble five or more tools in running differential gene expression studies and drug development. When promising compounds are identified, they are usually handed off to a pharmaceutical company in exchange for a 5 percent to 15 percent royalty. As the tool royalties stack up, the biotech player could be paying out some 25 percent to 50 percent of what they receive in royalties from drug companies. "We're going through the swing of the pendulum," says Holtzman, "there will have to be equilibrium. It may get to the point where everyone starts saying 'we won't sign these darn things.' "
May 29, 1998, is the alliance deck becoming "anti-stacked" against innovators? This is a very interesting report on the negotiations between various biotechnology players over shares of royalties in inventions with lots of inventors. From the article:
More and more "tool companies" are filling biotechnology's ranks and filing patents for nifty research aids like surface receptors or useful polymorphic markers. That's led to increasing grousing among Big Pharma about "stacking royalties," or the need for an eventual developer/marketer to license so many different technology puzzle pieces in order to advance a given project that the royalties reduce the eventual product's attractiveness.
In actual fact, so-called "anti-stacking" language has been around the biotechnology industry since its inception. Given the delays at the U.S. Patent Office, companies could rarely if ever negotiate contracts with full confidence about exactly how broad their intellectual property rights would be. The major pharmaceutical company's traditional argument for anti-stacking language ran something like this: If Big Pharma licenses a lead compound from Biotech and that compound is later blocked by another party's patent, it is Biotech who should bear the responsibility for that occurrence and shoulder the burden of crediting Big Pharma for the amount due the third party.
It seemed a pretty compelling argument to most biotechs developing recombinant proteins or monoclonal antibodies throughout the 1980s. So compelling that biotechs adopted the same protection in their licenses with universities - except now the anti-stacking language was applied to technologies as well as compounds. In analysis done by ReCap of university/biotech license agreements, about 80% have anti-stacking language for the benefit of the biotech company, and most of this language is of the "fully creditable to floor" variety. That means the university's take goes from, for example, 5% of net sales down to a floor rate of 2.5% if the biotech player has to pay third parties in excess of 2.5% in royalties as well.
But a funny thing happened when biotechs went "upstream" in the late 1980s and began doing technology deals in which the essence was helping big partners screen large libraries of compounds. Major pharmaceutical companies brought "university style" anti-stacking language into pharma/biotech agreements.
August 13, 1996, Intellectual Property Rights Summary Report and Recommendations of an International Meeting. Apparently a report from a meeting organized by the Rockefeller Foundation, dealing with issues regarding patents and the development of an AIDS vaccine.
Today,intellectual property rights impact every stage or vaccine development. As vaccine research and manufacturing become ever more complex, each step of the process is likely to be patented. The recombinant hepatitis B vaccine, for example, requires fourteen different patents to produce. Consequently, the resulting royalty payments significantly impact the vaccine's ultimate price and availability.

Examples

ddI license from NIH to BMS was initally for 5 percent of net sales.
3TC license from BioChem Pharma to Glaxo. 14 percent of sales.
The University of Minnesota license of its patent on Abacavir (Ziagen) to Glaxo Wellcome. This license was part of a patent infringement suit by the University:
The university will receive five percent of the first $300 million in world wide sales, seven percent of sales from $300 million to $700 million and 10 percent of sales over $700 million annually. (University of Minnesota Press Service, October 5, 1999)
Royalty litigation on '861 AIDS test patent. In this case, a court ruled that a 1 percent royalty was appropriate for the so called '861 patent,' which is used in an AIDS test kit. There are other patents and rights in the test kit.
Fluconalize. John S. James, Fluconazole: Pfizer Asked to Lower Africa Price. Includes this reference to an MSF/TAC request for a voluntary license for the Fluconazole patent:
On March 13, 2000 . . . Doctors Without Borders supported South Africa's AIDS-activist Treatment Action Campaign (TAC), which on the same day organized a delegation of union leaders, church leaders, and others representing millions of South Africans asking that Pfizer either lower the price, or grant a voluntary license allowing TAC to import the drug or manufacture it locally, with a 5% royalty to Pfizer.
Medizone International Inc license for patents on Ozone Decontamination of Blood and Blood Products.
The Patent, which covers a procedure for ozone decontamination of blood and blood products through the treatment of blood and blood components, is the Company's principal asset, and was purchased, together with rights to other ozone-related inventions, from Immunologics Limited Partnership, L.P. ("ILP") in 1987, for an aggregate of 6,000,000 shares of the Company's common stock (the "Patent Purchase Agreement"). . . The Patent Purchase Agreement requires the Company to pay to ILP an annual royalty equal to 3% of the net receipts (i.e., net receipts after all credits, returns and customary deductions, and exclusive of all taxes) received by the Company in connection with the sale of any product, device or apparatus embodying the Patent.
Schering-Plough's license for Vasomax. Reported by TheStreet.com:
Recently, Zonagen's stock has perked up on news that partner Schering-Plough (SGP:NYSE - news) will manufacture Vasomax, not a big surprise since the big drug company will sell the pill, if it's approved. Zonagen, of the Woodlands, Texas, will get a 20% to 22% royalty on U.S. Vasomax sales.
SmithKline Beecham's license for Frovatriptan. Reported by the Financial Times:
Peter Worrall, finance director, said the move would lift Vernalis's royalties on the drug from 17 to 24 per cent, although it would have little effect over the first four years, because of the staged payments to SB. Frovatriptan sales are forecast to reach Dollars 250m.

Suggestions, corrections or comments to James Love, at: love@cptech.org.

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