I am always fascinated by the pharmaceutical industry's fixation with not revealing royalty rates when disclosing information on a deal. In contrast, upfront and milestone payments are more often revealed in press releases and their details sometimes remain in full in SEC filings. Those of us who are in the business of doing deals do in fact know what the current royalty rates are, for we see them during our negotiations and when we conduct our due diligence exercises. Obviously, all of this information is confidential and has to remain so, but one often has to ask - why should either the licensor or the licensee hide the details of the finally agreed royalty rates?
Two years ago, in order to allow companies to get a better feel for royalty rates for technologies and products at different stages, PharmaVentures published a survey to establish what the going rates were, so there is some information available.1 In addition, since royalty payments are made when products enter the market, and the pharmaceutical industry has good access to sales data through a variety of sources (such as IMS), we actually know how licensees' products perform in the market-place. It follows then, does it not, that we ought to know the revenues received by the licensor?
"Companies understandably want commercially sensitive information to remain confidential - but is this a good thing?"
It is understandable that companies want what they consider to be 'commercially sensitive information' - such as royalty rates - to remain confidential, but is this a good thing? Public disclosure of commercial information has always led to a healthier and more honest market environment. The classic example is given by public equity markets, where we can establish current market capitalisations at a glance. The public disclosure of company accounts also enables investors and creditors to make sound decisions. In the absence of comparative data on royalty rates, pharma deal makers turn to companies such as ours for informed opinion because they want to make sensible decisions on their deal structures. So the drive and need for reasonable benchmarks are there, and one can conclude that public disclosure of royalty rates would help the industry enormously.
What, one may ask, is the advantage to the licensee and licensor in public disclosure of royalty rates? Well, knowing that these details will be made public would ensure reasonableness in the rates negotiated and demonstrate mutual confidence in a good deal between the parties. Moreover, investors in both the licensor and the licensee would be better served, and this would provide a boost to the investment attractiveness of the industry.
Fintan Walton
Chief Executive Officer
PharmaVentures Ltd
1PharmaDeals Survey, 2002. Current Trends in Global Pharmaceutical Licensing.