Knowing the Odds

Section I.O.? Third-Party Patents? ?As with patent filing discussed earlier, control over and costs associated with obtaining needed third-party patents have evolved into a key aspect of biopharma deal negotiation and alliance management.

Rather than recount that evolution here, however, I’ll focus on the impact of third-party patent obligations on royalty rates owed to project originators.? There is so much to discuss regarding post-commercialization payments (see Section II.D. Royalty Payments, still to come), it seems useful to discuss third party patent royalties specifically here.

BioSci did an analysis of 100 monoclonal alliances between 2000-18 with respect to third party royalty obligations.? Why monoclonals?? Whether it’s Cabilly, humanization, bispecifics or antibody-drug conjugates (ADCs), monoclonal projects have long been a minefield for third party patents.?

BioSci’s top line analysis showed that the project originator pays third party royalties in 25% of monoclonal deals; the project client pays in 25% of instances; and third party obligations are shared in 50% of monoclonal alliances.

The analysis gets more insightful, however, as one digs a bit deeper.? When the originator pays, in 2/3s of instances it’s responsible for all existing third-party royalties plus equal sharing of future obligations.? In 20% of such deals, the originator pays all obligations (existing plus future) down to a 50% royalty floor.? In only 10% of deals does the project originator pay all third-party royalties.

For example, here’s the third-party patent responsibilities from the 2016 Eleven Biotherapeutics alliance with Roche for IL-6 antibody antagonist:

By contrast, when the project client pays for third party royalties, it’s responsible for all existing third-party royalties plus a share of future obligations in half such alliances, and all third party royalties (existing plus future) in the other half.?? Here’s the contract language from Xoma’s CD40 monoclonal alliance with Novartis, restated in 2008:

Finally, with respect the 50 monoclonal alliances with shared third-party royalty obligations, BioSci found equal sharing in 1/3 of such deals, equal sharing down to a 50% or other limit in 1/3, and some other sharing formulation in the remaining third of deals.? As an example of such sharing, here’s the contract language from the 2009 Merrimack agreement with Sanofi for anti-ErbB3 human antibody:

The takeaway is this:? Whether negotiating to share an eventual royalty stream with third parties or assessing games of chance in Los Vegas, it’s helpful to know the probabilities of multiple scenarios before making one’s bet.

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You can see the introduction to this ongoing series of articles about best practices in biopharma licensing, or go directly to links to previously posted articles of the series here.