Alexander Moscho, Regina A. Hodits, Friedemann Janus, and Josef M.E. Leiter reply

We thank Douglas Reynolds for his detailed comments on our article. Our intentions were to provide a rational and easily applicable framework to determine appropriate deal terms reflecting each partner's contribution to the overall value of the product. To test and demonstrate the framework, we applied industry average figures to a specific case and determined the appropriate royalty rate from the results. There can be no doubt that, for a specific deal, all figures have to be adjusted to the characteristics of that unique situation, and that these are subject to negotiations between the licensing partners. We are convinced that it is beneficial for both licensing partners to negotiate deal terms on a rational basis rather than by following rules of thumb. Our view of the individual items to be negotiated is as follows:

For marketing and sales, we agree with Douglas Reynolds that during the launch phase, while sales are low, the marketing budget may even be a multiple of the annual sales. But the figure typically decreases sharply with increasing sales. In our view, the industry average of 25% is therefore appropriate, as it takes the whole patent life of a product into account.

We also agree that the establishment of biopharmaceutical manufacturing facilities and the required certification procedures are usually very time-consuming and costly. However, for blockbusters (e.g., in our article), these expenses clearly play a minor role. Also, the value contribution of manufacturing equals the cost of outsourcing to a third party, and not the cost of building facilities from scratch.

For the R&D contributions, the specific effort, time lines, and expenses need to be weighted on a case-by-case basis. As we noted in our article: “In these cases, the residual value. . .should be appropriately divided between the two partners, depending on how much each contributes to R&D.”

In addition, we do want to state that the percentage of sales potential attributed to the biotech company in our example is the total value to be received by the biotech company. Thus, it is the sum of the present values of upfront and milestone payments, as well as royalties on sales. How a company chooses to divide the total value between these components will strongly depend on its individual situation.

Finally, we think it is worth noting that the total amount of payments for Biochem Pharma added up to a little more than US $20 million, which is only a small fraction of the US $824 million in 3TC sales in 1998 alone. Both biotech and pharma companies engaged in either outlicensing or partnering might see this ratio as a reason to think twice about the framework on which their deal terms are based.

See “Making or breaking a deal” by Jones et al.