Royalties are a flexible mechanism for compensating inventors and other owners of intellectual property for their contribution to the development of a product. A typical biopharmaceutical product may have a number of unrelated parties that contribute to its successful development. These may include the product’s inventor and the university or other institution for which the inventor conducted research, the company that performed early clinical testing on the product, or the organization that provided a unique technology or expertise critical to the invention or development of the product. The royalty rights that each party is assigned is usually transferred through a license agreement.
The transfer of rights is commercially relevant because, typically, the licenses carry an obligation to pay royalties. Because royalties are generally priority payments based on a percentage of product revenue and not on the profitability of the marketing company, a royalty holder’s income is not adversely affected by the expenses of the marketer. For example, incremental costs incurred by the marketer for additional indications or to enhance marketing and promotion may, in fact, contribute to an increase in royalties to its holder.
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