This article is a continuation of a series on the state of translational research in North America:
- The opportunity cost to doing scientific research at a university
- A brief history of translational research funding in North America
- The current status of translational research funding in North America
- Bridging the gap between public and private research
Relevant associated articles by David Kent:
In the United States, institutions contributing to intellectual property typically determine the initial split of profits resulting from the invention (after payment of patent expenses) based upon the relative amount of research that was performed by the primary investigators at the contributing institutions. For example, if the discovery was made within a single university/department/lab, this university will claim 100 percent of the invention; whereas if the discovery was made as part of an academic collaboration between two universities equally, then each university may claim 50 percent of the invention.
Each institution will then split its institutional share according to its own institutional intellectual property policy. This can vary substantially between institutions and there is no standard. A common intellectual property policy at Tier 1 academic research institutions in the United States (as of the date of this writing) stipulates a 35 percent share accorded to the institute, a 20 percent share accorded to the department, and a 45 percent share accorded to the laboratory and inventors. Of the 45 percent, the principal investigator (PI) can determine how much stays in the lab versus is distributed among the inventors, with a maximum of 30 percent and minimum of 15 percent being available to each. In the common example where two universities contributed to the development of the intellectual property, the ownership percentage would be split first between the two institutions, and then each share split further according to the institutions intellectual property policy.
In the case where both universities contributed equally to the invention (assuming identical intellectual property policies), the ‘institution’ / ‘department’ / ‘laboratory and inventor’ shares might be 17.5 percent / 10 percent / 22.5 percent, respectively. Assuming the inventors were awarded the maximum 30 percent of their 45 percent stake, this translates to a 15 percent stake in the total invention (in the above example) that is then distributed among the inventors. Whereas the inventors’ share are retained by the inventors if/when they move, the laboratory share must be held within the hosting institution and typically will not follow a departing investigator outside of their institution.
Let’s assume that in this example there were two inventors in the academic lab (as is often the case): the PI and the postdoctoral fellow (PF). The PI and the PF would each receive 7.5 percent ownership stake of the invention that can follow them wherever they end up, and the PI’s lab would received and additional 7.5 percent ownership stake that only lasts as long as the PI remains at the institution.
Now the important point: the ownership percentage of a patent is worthless unless the patent itself is licensed or sold.
Licensing agreements typically include an up-front license issue fee, reimbursement of the institution’s legal expenses for patenting the IP, an annual license fee (broken into pre- and post- commercial sale) including an annual minimum royalty, milestone requirements and associated payments, royalty and sublicense income, and equity. Since universities are not in the business of bringing products to market, they will typically license (not sell) their patents to companies who are.
Within the license agreement are multiple terms, but the most significant one here is the royalty rate. A royalty is a payment to an owner for the ongoing use of their asset or property, such as patents, copyrighted works, franchises, or natural resources. Royalties are often expressed as a percentage of the gross or net revenues obtained using the owner’s property, but they can be negotiated to meet the specific needs of an arrangement. In intellectual property licensing agreements these are often low single-digit percentage of net sales. A common royalty rate on a licensed university patent is two percent. Until there is revenue that can be directly attributed to the patent, there will be no return.
The average time to market for an experimental drug in the United States (bench to bedside) is currently 12 years. An average of 0.02 percent of drugs that enter pre-clinical testing progress are commercially approved. For a two percent royalty rate on a VERY successful product – say $10M/year in revenue – that makes it, a university can expect to make $200,000 in profit that year. Importantly, the university will typically recover past and ongoing patent costs from this before applying the remainder to the ownership structure described above. Universities typically retain the right to do a financial audit of their patent portfolios to confirm payments are being made by the licensing institution that will also be recovered before profits are distributed. Overhead costs are not generally capped. Once we remove expenses (there is no clear definition of what can constitute overhead or how much this should be… so let’s assume $50,000?), leaving $150,000, which is then distributed according to the ownership structure above. In our example, each inventor will receive $11,250, and the laboratory will receive $11,250. It’s not nothing… but it’s small for a best-case outcome. Importantly, this is not the only line item in a license agreement. There are also license/up-front fees (paid by the company to the university to acquire the license), milestone costs (paid by the company to the university whenever a milestone is reached – eg. receiving IND approval, dosing their second Phase I clinical patient, dosing their second Phase II clinical trial patient, reviewing BLA approval… etc), and curiously, equity ownership (ownership percentage stake the university takes in the company – for biotech start-ups spun out from universities this is typically five percent). These can be in the millions+ and are one-time payments that are not shared according to the ownership structure above.
Conversely, a principal investigator or inventor losing their 7.5 percent share of their invention is a very small price to pay for the higher equity stake, higher salary, higher research budget, and bonus pay that they will receive by founding a company directly or joining the licensing company as a senior employee. We can do better. While we can debate the specifics, which will vary broadly between institutions, the take home is that IF universities are interested in incentivizing translational research and advancing intellectual property, the economics for scientists needs to change. At the end of the day, it’s the scientists that drive discovery.