Press Release

Strategic Analysis of Royalty Stacking for Pharmaceutical and Biopharmaceutical Products

London, UK, 31st January, 2005 - 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 (http://biotech.frost.com) 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."

If you are interested in an analysis overview providing an introduction into the Strategic Analysis of Royalty Stacking for Pharmaceutical and Biopharmaceutical Products  - then send an email to Katja Feick -Corporate Communications at katja.feick@frost.com with the following information: Full name, Company Name, Title, Contact Tel Number, Email. Upon receipt of the above information, an overview will be emailed to you.

Strategic Analysis of Royalty Stacking for Pharmaceutical and Biopharmaceutical Products

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Background

Frost & Sullivan, an international growth consultancy, has been supporting clients' expansion for more than four decades. Our market expertise covers a broad spectrum of industries, while our portfolio of advisory competencies includes custom strategic consulting, market intelligence, and management training. Our mission is to forge partnerships with our clients' management teams to deliver market insights and to create value and drive growth through innovative approaches. Frost & Sullivan's network of consultants, industry experts, corporate trainers, and support staff spans the globe with offices in every major country.

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Katja Feick

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List of key industry participants: Merck KgaA, Johnson & Johnson, Pfizer Inc, GlaxoSmithKline, Novartis, Roche, Bristol-Myers Squibb, AstraZeneca, Abbott, Aventis, Wyeth, Eli Lilly & Company, Schering-Plough, Tyco International, Bayer, Takeda Pharmaceutical Co. Ltd., Baxter Healthcare, Boehringer-Ingelheim, Sanofi-Aventis, Schering AG, Amgen, Genetech Inc., Amersham Plc, Biogen Inc., Serono AS, Genzyme Corp., Chiron Corp., MedImmune Inc., Gilead, Millennium