News for the Faculty of Graduate Studies and Research
Royalty Income from the Licensing of Biomedical Inventions
One of the hardest issues that OTT has to deal with during licence negotiations for biomedical inventions is the establishment of royalty rates for those inventions. It is a delicate balance: on the one hand, the University and the inventor want to maximize their income, but on the other hand, charging too high a royalty rate will result in the invention not being licensed. The final royalty charged is a compromise between a lower rate the company wants to pay and the higher rate the University and inventor want. In this article we would like to briefly discuss some of the guidelines we use when negotiating royalty rates during the licensing of biomedical inventions to companies.
A Royalty Rate Model
There are several well-known royalty rate models such as the "multivariate economic model" or the "profit maximization technique," which, while being sophisticated techniques in their own right, are too complex to be useful in daily licensing work. As well these models tend to be too theoretical and ignore the real world and what that world will actually pay for a biomedical licence.
The model we use at OTT is the "industry-standard" model. This model looks to previous licensing terms to set a norm for market segmented royalties. This model is grounded in what the market is willing to pay and helps set a standard of fairness. This is important because licensing arrangements set the tone for long-term relations between two parties where more than just the patented technology is transferred.
The biomedical licensing grid (Table 1, below) was published in the September 1995 issue of Genetic Engineering News and has been used by OTT over the past year as the basis for negotiating royalty rates for biomedical inventions.
Table 1: Biomedical Licensing Grid
| Technology Classification | Running Royalty | Up-front Payments |
|---|
| Reagents or Process Method | 1 - 5% | Recapture patent costs |
| Reagents for use in Research Kits | 2 - 10% | Recapture patent costs |
| Diagnostics, in vitro | 2 - 6% | $5,000 - $10,000, up to $20,000 or recapture patent costs |
| Diagnostics, in vivo | 3 - 8% | $5,000 - $10,000, up to $20,000 or recapture patent costs |
| Therapeutics | 4 - 12% | $20,000 - $50,000, up to $150,000 |
| Medical Instrumentation | 4 - 10% | $5,000 - $150,000 |
| Software | 3 - 15% | up to $200,000 |
Non-cash Trade-offs
Proposed royalty rates may be modified or offset by certain pledges that have value beyond immediate cash. For example, the promise of a licence to defend the validity of a patent can be valuable to a University. Some other non-cash items that may be used to trade off concessions in royalty rates include:
- limiting territory, use or product application of the technology,
- stronger "march-in" rights to rescue the technology if the licensee does not meet certain milestones,
- nonexclusivity, allowing the University to license the invention to more than one company.
As you can see, the issue of establishing royalty rates on biomedical inventions and, indeed, all inventions is not an easy task. It is a task that is best left for the professionals at OTT to deal with.
