Transcript Innovation and Intellectual Property

Cluster III: Financial Terms –
Forms of Payment and Other
Financial Terms
Kevin Nachtrab, Esq.
Senior Patent Attorney
Johnson & Johnson
Immediate Past President, LES International
Brussels, Belgium
Kevin Nachtrab©2013
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Non-Performance Based Payments
Performance-Based Payments
Royalties (incl. Offsets)
Payment Methods
Taxes
Reporting
Exchange Rates & Currency Issues
Records & Audit Rights
Common Definitions
Other Issues
Goal: To compensate for value of assets
Not designed to recouperate costs
Examples:
 Signing (Execution) Fee
 License Fees
 Patent Maintenance Fee
 Annual Fee
 Option Fees
Goal: To compensate for increased value of asset
due to occurrence of event demonstrating it
Examples:
 Development Milestones
Align with (Corporate) Stage-Gate Process
Typical Milestones
 Commercialization Milestones
Paid to mark increase in value
Paid as a “windfall” compensation
 How many times & How many Products
Goal: To compensate for extra value Asset has due
to exclusivity/differentiation IP brings to Asset
Common Basis for Royalties:
 Issued Claims
Product (Composition of Matter) Claims
Process Claims
Other Claims
 Pending Claims
 Know-How
 Regulatory Exclusivity
 Minimum Royalties (see Annual fees)
Goal: To compensate for extra value Asset has due
to exclusivity/differentiation IP brings to Asset
Common Rate Structures:
 Straight Royalty Rates
 Tiered Royalties Rates
 Time-Variable Royalty Rates
Single Royalty
Goal: To Share the risks presented by factors
that reduce sales/profitability of product
Examples:
 Anti-Royalty Stacking Clauses
 Compulsory Licenses
 Competition (Generic & Otherwise)
 Combination Products
 Most Favored Licensee (MFL)
Goal: To insure that payments are made in an
efficient, timely manner
How to get Paid
 Payment against Invoices
 Wire Transfers
 Checks
Forms of Payment
 Immediately available funds
Goal: To insure that assessed party actually
pays the tax & excess taxes are not paid
 Pass-through entity
 Payments with or without tax
 Recuperation of taxes paid for other
(Withholding tax)
 Information sharing
 Co-operation
 Double-taxation treaties
Goal: To insure proper application of exchange rates
 Use Accepted Indices
Federal Reserve Bank
Wall Street Journal
 Internal Corporate Procedures
Customary & Usual
Consistently applied
 Currency Hedge Rates
Goal: To insure reporting of information needed
for Party to assess if it has received full
amounts to which it has right
Royalty Reports
 Form
 Content
 Timing
Audit Rights
 Who can do
 When done
 Reporting
 Effect of Audit
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Net Sales
Valid Claim
Royalty Term
Calendar Quarter
Calendar Year
Combination Product
First Commercial Sale
Generic Product
Competing Product
Standard Definition
“Net Sales” means, with respect to a particular time period, the gross
amount invoiced by Genentech and its Sublicensees (or Distributors on
behalf of the foregoing parties) for sales of Licensed Products (such
Licensed Products being in final form intended for use by the end user) in
arms length transactions with Third Parties during such time period, less
the following estimated and/or incurred charges or expenses, to the
extent each is actually incurred and included in the invoiced gross sales
price:
The specific deductions taken under, and the general provisions of, X
through Y above shall be adjusted periodically as necessary to reflect
amounts actually incurred. Sales between Genentech and its
Sublicensees (or Distributors of the foregoing parties) shall be
disregarded for purposes of calculating Net Sales. Notwithstanding
anything herein to the contrary, in all cases Net Sales shall be determined
in accordance with GAAP.
Source: Drug Discovery and Collaboration Agreement between Genentech, Inc. & Curis, Inc.
Common Addition
“Net Sales” means, …
The specific deductions taken under, and the general provisions of, X
through Y above shall be adjusted periodically as necessary to reflect
amounts actually incurred. Sales between Genentech and its
Sublicensees (or Distributors of the foregoing parties) shall be
disregarded for purposes of calculating Net Sales. Notwithstanding
anything herein to the contrary, in all cases Net Sales shall be determined
in accordance with GAAP.”
Source: Drug Discovery and Collaboration Agreement between Genentech, Inc. & Curis, Inc.
Common Deductions in Net Sales Definition
trade, cash and quantity discounts or rebates actually allowed or taken;
credits or allowances given or made for rejection or return of, and for
uncollectible amounts on, previously sold Licensed Products or for
retroactive price reductions (including rebates similar to Medicare and/or
Medicaid);
taxes, duties or other governmental charges levied on or measured by
the billing amount, as adjusted for rebates or refunds, that are borne by
the seller thereof and that are not refundable and to the extent noncreditable;
charges for freight and insurance directly related to the distribution of the
Licensed Products (to the extent not paid by the Third Party customer);
credits or allowances given or made for wastage replacement, indigent
patient and similar programs.
Source: Drug Discovery and Collaboration Agreement between Genentech, Inc. & Curis, Inc.
Common Deductions in Net Sales Definition
Health Care Rebates
“…
iii) normal and customary trade, quantity and cash discounts allowed and
charge back payments and rebates granted to managed health care
organizations or to federal, state and local governments, their agencies
and purchasers and reimbursees, including but not limited to Medicaid
rebates or to trade customers, including but not limited to wholesalers,
chain and pharmacy buying groups; …”
Source: Therapeutic Collaboration Agreement between SmithKline Glaxo and HGH
Combination Product in Net Sales Definition
In the event a Licensed Product is sold in combination with one or more
other active pharmaceutical ingredients (as used in this definition of Net
Sales, a “Combination”), then Net Sales shall be calculated by
multiplying the Net Sales of such Combination by the fraction A/B, where
A is the gross selling price of the Licensed Product sold separately and B
is the gross selling price of the Combination. In the event that no such
separate sales are made, Net Sales for royalty determination shall be
calculated by multiplying Net Sales of the Combination by the fraction
C/(C+D), where C is the fully allocated cost of the Licensed Product and D
is the fully allocated cost of the other active pharmaceutical ingredient(s)
in the Combination.
Source: Drug Discovery and Collaboration Agreement between Genentech, Inc. & Curis, Inc.
"Valid Patent Claim" means a claim of an
issued and unexpired patent included within
the Patents, which has not been revoked or
held unenforceable or invalid by a decision of
a court or other governmental agency of
competent jurisdiction, unappealable or
unappealed within the time allowed for appeal,
and which has not been disclaimed, denied or
admitted to be invalid or unenforceable
through reissue or disclaimer or otherwise.
Source: Research and Collaboration Agreement between Decode Genetics and Merck & Co., Inc.
If Pending Claims are Royalty-Bearing
“With respect to pending claims in a
pending patent application, Valid Claim
shall not include any claim contained a
pending patent application more than five
(5) years following the earliest priority date
for said patent application.”
The Royalty Term for each Licensed Product shall begin on the date of the
first commercial sale of such Licensed Product in a particular country, and
continue, on a Licensed Product-by-Licensed Product and country-bycountry basis:
(i) in the case of a Valid Claim Product, until the expiration of the last-toexpire Valid Claim in the Licensed IP that Covers such Valid Claim Product;
(ii) in the case of a Genentech Modified Product, until the earlier of (A) [**]
years from the date of such first commercial sale, for sales in the United
States; or [**] years from the date of such first commercial sale, for sales
outside the United States; or (B) approval by the FDA or other relevant
regulatory authority in such country of an ANDA for which the reference
drug is such Genentech Modified Product;
(iii) in the case of a Know-How Product, until [**] years from the date of
such first commercial sale of such Know-How Product in such country; &
(iv) in the case of a Non-Collaboration Product, until the expiration of the
last-to-expire Valid Claim in the Licensed IP that Covers such NonCollaboration Product.
Source: Drug Discovery and Collaboration Agreement between Genentech, Inc. & Curis, Inc.
"Calendar Quarter" shall mean the
respective periods of three (3)
consecutive calendar months ending
on March 31, June 30, September 30
and December 31.
Source: Research and Collaboration Agreement between Decode Genetics and Merck & Co., Inc.
"Calendar Year" shall mean each
successive period of twelve (12)
months commencing on January 1
and ending on December 31.
Source: Research and Collaboration Agreement between Decode Genetics and Merck & Co., Inc.
"Combination Product" shall mean a
Product which includes one or more
active ingredients other than Compound
in combination with Compound.
Source: Research and Collaboration Agreement between Decode Genetics and Merck & Co., Inc.
“First Commercial Sale” means, with respect to a particular
Licensed Product for a specific Indication in a given country, the
first bona fide commercial sale of such Licensed Product
following Marketing Approval for such Indication in such country
by or under authority of Genentech or its Sublicensees.
Source: Drug Discovery and Collaboration Agreement between Genentech, Inc. & Curis, Inc.
“First Commercial Sale" means the first sale of Product in the
Territory, after Regulatory Approval, by DAS or its Affiliates (or
their sublicensee(s)) to any unaffiliated third party as evidenced
by the selling party's invoice or other relevant document to such
third party. A sale to an unaffiliated third party shall not include
quantities delivered solely for research purposes, for clinical trials
or quantities distributed as samples or promotions.
License Agreement between Abbott laboratories and Drug Abuse Sciences, Inc
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“Generic Product” means a product that
has been approved by the FDA, or other
relevant regulatory authority in such
country, of an ANDA, or the equivalent
thereof in such country for which the
reference drug is such Genentech
Modified Product.”
“Competing Product” means a
product sold by a Third Party that (a)
has Marketing Approval or a
published clinical study in a peer
reviewed journal in the same
Therapeutic Area as a Licensed
Product; and (b) modulates [**] as one
of its primary mechanisms of action.
Source: Drug Discovery and Collaboration Agreement between Genentech, Inc. & Curis, Inc.
 Sublicense Income
Monetary Income
Payments-in-Kind
 Research Funding
Yearly Budgets (Study Costs)
FTE Costs
 Distribution Agreements
Transfer Price
Cost of Goods (COGs)
Price Minimums & Maximums