Evolving Deal Terms

Compulsory License Provisions in Biopharma Alliances

Mark Edwards Mark Edwards
Over the past two decades, the biopharma industry has steadily accumulated custom and practice with respect to compulsory license provisions. With Covid, those provisions might now be tested.
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Due in large part to the widely divergent prices of, and ability to pay for, pharmaceutical products around the world, the prospect of compulsory licensing by one or more governmental authority has loomed over the biopharma industry for several decades. With several hundred Covid alliances in place, and expectations running high for imminent regulatory approvals of multiple Covid-related therapeutics and vaccines, now seems an appropriate time to examine industry custom and practice with respect to compulsory licensing provisions in biopharma alliances.

An example is shown in Figure 1, a snapshot of the recently announced alliance between Atea Pharmaceuticals and Roche for the ex-US commercialization of AT-527, Atea’s Phase II anti-viral for the treatment of Covid-19. In this instance, double-digit royalties might be replaced by substantially less sales-related compensation in the event that Roche enters into one or more compulsory licenses for AT-527.

To understand what have been the terms of and variations in compulsory license provisions, we analyzed such provisions in SEC-filed biopharma licenses commenced over the past two decades.

Methodology

For purposes of this analysis, we looked at license agreements since January 2001 which had the term “compulsory license” (“CL”) in an SEC-filed contract. We found 105 such agreements in unredacted contracts (FOIA or SEC Full), plus an additional 25 recent agreements which, though redacted, permitted classification of the CL provision. We then tagged and classified the type of CL provision found in each of these 130 agreements, as shown in the CL Provisions spreadsheet accompanying this article. Specifically, we tagged the following CL-related contract provisions, where applicable, in each of the SEC-filed contracts:

  • Definition of Compulsory License
  • Adjustment of royalty terms in the event a CL is granted
  • Impact of a CL on Net Sales, Sublicensee, milestone(s) or minimum annual sales terms
  • Commercially Reasonable Efforts (CRE) obligations with respect to requests for CL

As with most BioSci analyses, the deal-specific CL provisions included in this analysis are accessible directly via the embedded “Tags” in the spreadsheet. Subscribers to BiosciDB.com may also access the deal press release, financial notes disclosures and full contract(s) from which these provisions were extracted by following the “Deal” link.

Until Covid, Compulsory License Provisions were Rarely Included in Biopharma Alliances

Of approximately 2000 unredacted biopharma licenses since January 2001 in the BioSci database, only 5% (105) had CL provisions. This indicates that compulsory licensing hasn’t been a pervasive licensing issue for much of the past two decades. Moreover, while there have been 400+ announced Covid-related deals to date, only 13% (54 deals) of Covid deals have been SEC-filed, and only six of the 25 recent SEC-redacted agreements having evaluable CL provisions were focused on anti-virals.

For these reasons, therefore, our analysis of historical CL terms may or may not pertain to the current wave of Covid deals, or to alliances that may be struck after one or more compulsory licenses is actually granted. However, what follows is indicative of biopharma custom and practice with respect to CL provisions to date.

Most CL Provisions Reduce the Royalty to the CL Rate

As shown in Figure 2 and the CL Provisions spreadsheet accompanying this article, 71% (92 deals) of CL provisions reduce the royalty paid to the licensor to the CL royalty rate. Of these instances, 5 deals allow additional royalty reductions for Generics or Third Party Patent royalties, and 5 deals provide a floor royalty, notwithstanding the CL royalty rate.

Of the 92 licenses having CL provisions that reduce the royalty paid to the licensor to the CL royalty rate, 45% (41 deals) are with Top Pharma as licensee. Among such licensees, Merck is the licensee in 21 instances, followed by GlaxoSmithKline in five agreements. Interestingly, in one instance (AstraZeneca/Targacept in 1205), if a compulsory license is granted to a European country, then the royalty rate paid to the licensor for all of Europe is reduced to the CL royalty rate.

21% (28 deals) of CL provisions provide that the CL royalty rate be shared between the parties, with 50% sharing as the most common percentage. 5% (6 deals) of CL provisions state that the parties will negotiate the royalty to be paid to the licensor in the event a compulsory license occurs. 3% (4 deals) of CL provisions provide that no royalty will be paid to the licensor in any country where there is a compulsory license.

Some Provisions Require Licensees Use Commercially Reasonable Efforts to Oppose CL Requests

12% (16 deals) of CL provisions require the licensee to use commercially reasonable efforts (CRE) to oppose any requested compulsory license. Of these instances, 12 deals reduce the royalty paid to the licensor to the CL royalty rate, 2 deals provide that the CL royalty rate be shared between the parties, and 2 deals state that the parties will negotiate the royalty to be paid to the licensor in the event a compulsory license occurs. Interestingly, one deal with CRE obligations (Idenix/Metabasis in 1006) provides for no royalty in the event the licensee supplies at or below manufacturing cost to address a health crisis or emergency or on a humanitarian or charitable basis.

Conclusions

As Covid alliances begin to produce valuable anti-viral treatments and vaccines, discussions regarding compulsory license terms and contingencies will become increasingly important, both to alliance parties and to the biopharma industry generally. The biopharma industry is likely to be evaluated both as innovator and as responsible corporate citizen at this time of global pandemic.