Solutions to royalty stacking issues a top priority in pharmaceutical and biotechnology sectors

As new technologies are innovated in the pharmaceutical and biotechnology sectors, the number of fresh patents and related regulations is also on the rise.

With patents materialising as the most recognised form of intellectual property fortification, companies are increasingly becoming dependent on patented research tools and techniques. Royalty stacking is primarily the largest patent dilemma industry participants must work towards overcoming.

Royalty stacking, which is the sharing of third-party royalties, is caused by a multiplicity of overlapping patents. Compelled to pay large amounts to obtain these multiple licences, companies are forced to raise prices and are being discouraged to undertake technical innovation.

"The concept of royalty stacking arises from the risk that multiple patents may affect a single product," explains Frost & Sullivan Industry Manager Dr. Raju Adhikari. "As a result, the intellectual property necessary to get a product onto the market is owned by several different parties (known as anti commons), all of which demand a royalty payment from the ultimate seller of the product in question."

For instance, a vaccine plus adjuvant would be a difficult option to commercialise due to the multiple, overlapping patents held by varying parties.

While establishments such as the Organisation for Economic Co-operation and Development (OECD) are mandating licensing to avoid commercial uncertainty, the growing litigation is expected to retard time to market. Increased costs on end products are another hazardous offshoot of escalating patent costs with nearly 20 per cent of net prices based on expenses being incurred on account of royalty stacking and patent thickets.

Besides rising production costs, stacking is also constraining research with limited access to upstream, foundational discoveries causing closure of vital projects mid way through development, and is affecting the abilities of participating companies to effectively commercialise new products and services.

"Moreover, there is a growing reluctance by pharmaceutical companies to form strategic alliances with biotechnology companies for the fear of potential royalty stacking risks, which can reduce profits to a point where pursuing commercialisation is no longer viable," says Dr. Adhikari. "This has a direct impact on biotechnology sustainability and drug development times."

To successfully foster innovation in the pharmaceutical and biopharmaceutical sectors, options such as the use of clearing houses, consortia and cross-licensing are expected to aid participants to overcome royalty stacking. Patent pools, exclusive and non-exclusive licences are other effective tools against problems posed by multiple licences. Demanding up-front payments rather than royalties and risk-adjusted royalties are also prudent alternatives.

"Royalty rates must also be adjusted to reflect the reality of commercial situation," explains Dr. Adhikari. "For instance, contracts could indicate the minimum and maximum levels of royalty rates, depending on the number of research tools that need to be licensed and on the risk that technologies may infringe other patents."

Alternatives such as private contractual deals with ceilings on cumulative royalties must be deployed to combat patent issues such as royalty stacking. It is imperative that companies analyse contracts to the minutest details to avoid future predicaments besides focusing only on research and development (R&D) expenditures or technology rights.

Though the number of instances of royalty offset clauses issues are rare in Europe, the potential influx of products in the market is expected to increase problems associated with these clauses.

"Participants must thoroughly identify what each party involved in the collaboration is trying to achieve through the inclusion of a royalty offset clause and ensure the wording is drafted as narrowly as possible to reflect the agreed-upon position," advises Dr. Adhikari. "Further, companies should try and eliminate any duplicative clause and ensure the overlapping language in the clauses is as nearly identical as it can be made."