Duration of Royalty Obligations
’Til Death Do Us Part?
BioSci has undertaken an analysis of royalty term provisions in hopes that future biopharma alliances might add clarity to this crucial aspect of the deal negotiation.
Now that several hundred products from biopharma alliances have come to market, there is increased focus, even fixation, on royalty provisions. This is as it should be: Once the risk-adjusted value of royalty-based annuities has been re-assessed in light of actual market conditions, this element of alliance economics typically dominates all pre-launch payments.
Biopharma contract language addressing the duration of royalty obligations, or "royalty term", has lately been subjected to increased scrutiny by multiple interested parties, including licensees (plus any commercialization partners), licensors (including inventors at academic institutions) and third parties such as royalty monetization funds. In certain instances, ambiguity now appears to reside in royalty term provisions that had long been thought to be clear. With ongoing royalty payments at stake and litigators on speed dial, little can be done to stem the current wave of disputes.
In hopes that future biopharma alliance negotiations might add clarity to this aspect of biopharma contracts, however, BioSci has undertaken an analysis of royalty term provisions using its BiosciDB database of SEC-filed biopharma alliances. As with most BioSci analyses, the tags to each royalty term provision included in the analysis that follows are accessible directly via the links in the embedded spreadsheet. Subscribers to BiosciDB may also access the full biopharma alliance from which each royalty term provision was extracted.
As of mid-year 2015, BioSci’s analysts had tagged approximately 1,100 royalty term provisions of SEC-filed biopharma alliances commenced over the past three decades. We reviewed each tag and characterized its elements, each typically pertaining to sales of licensed product in the licensed territory, on a country-by-country basis, and consisting of one or more of the following:
- Life of Patents – expiration of valid licensed patents, including any patent term extension for a licensed patent that covers a licensed product;
- Years after First Commercial Sale (FCS) – a specific number of years following FCS, ranging from 3 to 25:
- Years after Signing – a specific number of years from the effective date of the agreement, ranging from 2 to 100;
- Duration of Regulatory Exclusivity – expiration of any government-granted exclusivity, such as orphan drug designation;
- Duration of Market Exclusivity – entrance of generic or other product-specific competition;
- Duration of Product Sales – withdrawal of the product from the market; or
- Later/Earlier of two or more elements listed above.
Additionally, we grouped the contracts as either "institutional" or "commercial" depending on the type of licensor, as well as by agreement date for trend analysis.
Typical Structure of Biopharma Royalty Terms.
Unsurprisingly, the most common element in biopharma royalty term provisions is life of patents. 85% (961 of 1129) of the tags included life of patents as an element of royalty term – 27% (305 of 1129) of deals had life of patents as the only element defining royalty duration, while the remaining 58% (656 of 1129) had at least one other element, with years after FCS accounting for 49% (551 of 1129). Half of all royalty term provisions were structured as "later of …" with "later of life of patents or x years after FCS" accounting for 44% (492 of 1129) of all tagged provisions.
56% (627 of 1129) royalty term provisions included years after FCS as an element of royalty term. 35% (400 of 1129) of deals had 10 years after FCS as the specific royalty duration, while 14% (154 of 1129) were in the range of 12 to 15 years after FCS. The most common specific royalty term structure was "later of life of patents or 10 years after FCS" – 30% (338 of 1129) of royalty term provisions used this formulation. Less commonly used elements of royalty term were years after signing (11%), duration of product sales (5%), and duration of regulatory or market exclusivity, with 2% each.
Institutional Versus Commercial Licensors.
22% (246 of 1129) of the tagged royalty term provisions involved licenses from universities, research institutes or equivalent institutions. As compared to the 78% (883 of 1129) of agreements wherein the licensor was a commercial entity, life of patent was even more dominant in biopharma alliances involving institutions – 94% (232 of 246) of these tags included life of patents as an element of royalty term, and 65% (161 of 246) of academic deals had life of patents as the only element defining royalty duration. For deals between commercial entities, life of patent was included in 83% (729 of 883) of deals, but it was the only element defining royalty duration in only 16% (145 of 883) of instances.
"Later of …" royalty term structures were found in 14% (46 of 246) of institutional deals, as compared to 59% (524 of 883) of deals between commercial entities. Coupling of "later of life of patents or x years after FCS" occurred in 9% (22 of 246) of deals involving institutions, versus 54% (474 of 883) of deals between commercial entities. Years after FCS was generally less often an element in royalty terms involving institutions as licensors – 18% (44 of 246) included FCS as an element, with 9% (22 of 246) having 10 years after FCS as the specific royalty duration. By contrast, 66% (583 of 883) of commercial deals had FCS as an element, with 43% (378 of 883) having 10 years after FCS as the specific royalty duration.
Regarding less commonly used elements of royalty term, biopharma alliances with institutions as licensors were more likely to use years after signing (15% versus 10%) and duration of regulatory exclusivity (4% versus 2%), but less likely to use duration of product sales (0.4% versus 6%) or duration of market exclusivity (0% versus 3%).
We grouped the tagged provisions by agreement date in five year intervals of 2011-15 (115 tags), 2006-10 (213 tags), and 2001-05 (333 tags), and a final group of pre-2001 agreements (468 tags). We found the frequency of usage of royalty term elements to be quite stable over these intervals, with the exception of the use of the "later of …" formulation, which increased steadily from 48% (226 of 468) in the pre-2001 group to 57% (66 of 115) in the 2011-15 deals. Similarly the "later of life of patents or x years after FCS" structure went from 42% (196 of 468) in the pre-2001 group to 50% (57 of 115) in the 2011-15 deals.
Finally we utilized the same agreement date groupings with respect to the commercial deals, yielding 2011-15 (79 tags), 2006-10 (161 tags), 2001-05 (277 tags) and pre-2001 (366 tags) subsets. We found the frequency of usage of royalty term elements to be quite stable for these intervals, again with the exception of the use of the "later of …" formulation. For commercial deals, the "later of …" royalty term structure increased steadily from 53% (195 of 366) in the pre-2001 group to 76% (60 of 79) in the 2011-15 deals. Similarly the "later of life of patents or x years after FCS" structure went from 47% (171 of 366) in the pre-2001 group to 68% (54 of 79) in the 2011-15 deals.
As compared to other aspects of biopharma alliance negotiations (e.g. non-compete clauses or shared development and commercialization expenses), there appears to be a general and sustained consensus around industry custom and practice with respect to royalty term provisions. Since this set of provisions comes into focus when cash is flowing and each party’s self-interest may provoke opportunism in the presence of ambiguity, parties to biopharma alliances ought to consider carefully the duration of royalty they intend, and then strive to articulate that particular formulation with sufficient clarity that it remains unambiguous many years hence.