NPV PERCENTAGE- AN IMPORTANT ASPECT OF PATENT LICENSING AGREEMENTS
By Radhika Shrikant Adwant, Manchester University, UK
Intellectual property is an integral part of the research and development sector. Patenting is the best way by which a company can protect its developed product and/or process. Thus, a product or a process is an integral clause of company agreements and licenses.
Grant of a Patent gives the patentee the right to monopolize his/her work for a period of 20 years. Within the span of 20 years if anyone wants to use the process or product, the patentee has the sole right to grant the permission to use the said patent or decline it. The patent can be used by a third party by licensing it at the cost of royalty rate (%) put forth by the patentee (similar to the concept of lease agreement). Legal issues can arise if the patent is used without the permission of the patentee. However, the patent expires once it enters the public domain and can be used without the permission of the patentee.
In the Biopharmaceutical and Biotechnology industry, the result of research-invention is either commercialized or patented. The patented invention is then licensed to multinational biopharmaceutical and / or biotech companies which are developing similar inventions. The license can either be an exclusive license (the invention can be exclusively used by the company only, the patentee cannot license it to any third party) or a non-exclusive one (invention can be patented to more than one company). An exclusive license includes royalty payment which can be payed either partially, i.e after achieving every milestone set up by the patentee, or as a whole according to the license agreement to be signed between the patentee and the company.
‘NPV-net present’ value is another aspect of the exclusive agreement. License fee agreed upon by the company in any currency will have a specific value which will decline year to year as the 20 years of the patent period will pass. This would be a loss to the patentee as he will get less percentage of the expected royalty or percentage of the total deal value proposed. In order to avoid this, NPV calculations are undertaken.
Discount rate in combination with the royalty rate defines a viable licensing agreement between two parties. Theoretically, it is known that for any deal to be viable NPV calculated should be more then 0. But ideally for the deal to be a win-win situation for both sides, NPV percentage should be assumed to be higher than at least 30% of the total deal value (consisting of manufacturing cost, selling price of the product, discount accounted on the selling price and the royalty percentage proposed by the patentee). The license will be agreed to and signed by the two parties only when both of them agree to the clauses proposed in the license agreement. There is a high possibility that either of the parties can negotiate over the conditions put forth and end up at a comman decision.
Hence, a high NPV percentage as well as royalty rate should be proposed, which after negotiation can be optimal and agreeable for both the parties. NPV calculation is thus the best way to execute a win-win condition for both, the patentee as well as the licensee.
Radhika is pursuing an M.Sc course in Biotechnology and Enterprise from the University of Manchester, Manchester, UK.