How to Navigate Invention Royalty Agreements and Payments

Royalties are at the core of invention and innovation in biotech. But establishing agreements, calculating rates, and handling payments can be complex, and processes don’t always get the investment they deserve.

MetaComet® is here to help, with tools and expertise that simplify the tasks and substantially reduce the time and cost of managing royalties. Here’s our introduction to the role of invention royalties and ways to establish agreements that work for both biotech companies and Intellectual Property (IP) holders.

Why Invention Royalties Matter

Biotech companies’ licensing of inventions from individuals, universities or other organizations is the foundation of their work. In return for acquiring rights or patents, companies pay their owners a percentage of the revenue that is generated from sales of products that result, a flat fee, or a combination of both. The percentage of payments is the royalty.

Contractual agreements for these royalties set out the terms on which inventions may be used and the rates that will be paid. For those receiving the invention royalties, the system creates the financial motivation that is needed to research, invent and patent, and the confidence that their ideas and IP will be protected. For biotech companies, it ensures that inventions can be used with confidence on a mutually satisfactory basis, with fair recompense for those who have put in the hard work to create them. (You can read more about how royalty systems work in another of our articles.)

Sound royalty agreements also ensure legal compliance and mitigate risk on both sides of the equation. The heavy regulation of biotech companies includes rigorous reporting and disclosure obligations and onerous financial audits, and good royalty accounting practice reduces the risk of error and establishes a trail for any scrutiny.

Setting the Rates

There are no hard and fast rules for invention royalty agreements—especially in a sector like biotech where licensing can be complex and multi-layered, with various stakeholders requiring a place in contracts—but the fundamentals are similar to other types of contracts.

Perhaps the most important aspect of an invention royalty agreement is the rates of royalty. These vary widely according to the type of invention, the extent to which it can be used, competition, exclusivity levels, and many more factors. The status of the invention will also influence its value, and an established patent with clear applications will likely attract higher royalties than a newer one with unclear potential. 

While it’s a broad range, 5% of sales is a reasonable royalty benchmark, and UpCounsel, the legal agency, estimates that average royalty rates typically range from 3% to 6% of gross sales. Specialist advice is available to help inventors and biotech companies determine the exact value of the IP.

Building Transparency and Trust

On rates as with much else in contractual affairs, transparency is vital. Both sides need to be able to trust that contracts will serve their needs and will not be in dispute at a later date. Negotiation of terms may be laborious at the time, but should ensure a sound agreement by which everyone can abide. Given the high stakes of an investment in an invention, time invested in preparing the agreement is time well spent.

Once settled, agreements need to be backed by efficient royalty calculations and payments. Statements must be scrupulously accurate and capable of delivering insightful reports into performance that help a company assess the value of its IP investment. Accounting should fit seamlessly with in-house financial and accounting systems. For the individuals and institutions behind the inventions, statements must be as transparent as possible and available on demand, while payments should adhere to agreed schedules.

Fixing the Problems

While the basic concept of invention-related royalties is simple, agreements can be very complex in practice. Multiple territories and associated currencies might be involved, and tiers, deductions, discounts and advances are likely to be necessary. 

All this means biotech companies can find it cumbersome and time-consuming to calculate invention royalties—especially if the task is handled manually or without a centralized system. Royalty administration can soak up hours of work in finance departments that could be better spent on higher value tasks elsewhere in the business. 

In common with all sectors using royalties, poor management also brings a reputational risk. If processes are unwieldy, calculation errors can creep in and deadlines might be missed. That can damage relationships with partners and rapidly affect a biotech company’s reputation in the research community. Poor data security means sensitive financial information might be accessed by unauthorized personnel or otherwise compromised.

Introducing the MetaComet® Solution

MetaComet has the software solutions for these and other big stresses of managing invention royalties. By automating tasks, processing royalties becomes faster and deadlines are more attainable—even when terms are ultra-complex and sales files run into the thousands of entries. A sales aggregator tool harmonizes this complex data and adjusts for foreign currencies, while automation dramatically reduces the input required from teams, cutting stress and raising productivity. Making the switch from the drudgery of spreadsheets to the convenience of a single-button process can be transformative.

Crucially, reducing manual involvement heightens the accuracy of royalty reporting. MetaComet’s SOC 2 Type II certification and rigorous stress-testing meanwhile ensures data is secure and access is reliable. Flexibility is built-in, helping businesses deal with all the complexities of their agreements. For royalty recipients, MetaComet’s secure portal provides access to real-time statements, generating the transparency and trust that is so vital in biotech development.

On the service side, MetaComet’s 25 years of experience in royalties means companies get best-in-class care, including straightforward onboarding and superb ongoing support. The result is more efficient operations internally and great relations externally.

Does your biotech business need to improve its invention royalty management? To discuss your needs and learn more about MetaComet’s solutions, including the flagship Royalty Tracker®, contact the team.