More and more "tool companies" are filling biotechnology's ranks and filing patents for nifty research aids like surface receptors or useful polymorphic markers. That's led to increasing grousing among Big Pharma about "stacking royalties," or the need for an eventual developer/marketer to license so many different technology puzzle pieces in order to advance a given project that the royalties reduce the eventual product's attractiveness.

In actual fact, so-called "anti-stacking" language has been around the biotechnology industry since its inception. Given the delays at the U.S. Patent Office, companies could rarely if ever negotiate contracts with full confidence about exactly how broad their intellectual property rights would be. The major pharmaceutical company's traditional argument for anti-stacking language ran something like this: If Big Pharma licenses a lead compound from Biotech and that compound is later blocked by another party's patent, it is Biotech who should bear the responsibility for that occurrence and shoulder the burden of crediting Big Pharma for the amount due the third party.

It seemed a pretty compelling argument to most biotechs developing recombinant proteins or monoclonal antibodies throughout the 1980s. So compelling that biotechs adopted the same protection in their licenses with universities - except now the anti-stacking language was applied to technologies as well as compounds. In analysis done by ReCap of university/biotech license agreements, about 80% have anti-stacking language for the benefit of the biotech company, and most of this language is of the "fully creditable to floor" variety. That means the university's take goes from, for example, 5% of net sales down to a floor rate of 2.5% if the biotech player has to pay third parties in excess of 2.5% in royalties as well.

But a funny thing happened when biotechs went "upstream" in the late 1980s and began doing technology deals in which the essence was helping big partners screen large libraries of compounds. Major pharmaceutical companies brought "university style" anti-stacking language into pharma/biotech agreements.

The conversation starts with the traditional "blocking patent" concession, but then continues: "What if I need somebody else's technology to get this product to market? If I take a license, you'll get the benefit, and so you should pay part of the freight." After all, the biotech realizes, a full royalty on no product sales is still $0, so the pharma partner appeals to the biotech's desire to get a product on the market in asking the biotech to share the royalty stacking risk.

Typically, the eventual upshot is "percentage creditable to floor" anti-stacking language in pharma/biotech screening deals, in part because sorting out blocking patents from those that are closely related but do not block is a long, arduous and expensive proposition. So, the risk of later stacked royalties ends up partially creditable in the deal, down to some floor rate.

More recently, however, biotech companies have made their way so far upstream that the more straightforward notion of "screening" has now become a three-headed hydra: Biotech companies can offer up targets, for example, such as cloned receptor sub-types; or they may have developed a superior assay or technology to extract an answer from the screening process; or, perhaps in addition, they may have added value through a variety of systems, such as high-throughput technology to test large numbers of compounds at once. In addition, deals involving genomics (both the sequencing of genes and the determination of function) and combinatorial deals for technology that generates huge numbers of compound libraries have emerged "upstream" of screening alliances.

At least initially, all six types of "platform" deals got approximately the same type of anti-stacking treatment as the early screening deals. However, the "floor" rates are now adding up to a pretty big cumulative royalty exposure for a pharmaceutical company who may use platform pieces from multiple alliances. In other words, if the anti-stacking protection was that the licensor took some (or all) of a third party hit, down to a floor rate, but the floor rate gets reached with several more third party obligations still owed, the large pharmaceutical licensee has a problem. One example of that is SmithKline Beecham's complex array of licensed technologies from such players as Human Genome Sciences, Cadus, Orchid and others. There is anti-stacking language in most of these agreements, yet in disease areas such as inflammation or osteoporosis it's conceivable the potential royalty exposure to net sales of a given product could exceed 20%.

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[This slide uses real royalty rates where known (HGS), and assumed obligations for unknown rates (8% for expression, down to 4% floor, 10% for targets, down to 5% floor, 1-2% for other technologies).]

One solution some companies have attempted is to drop the licenses to technology that didn't make a big contribution to an actual product. The problem with that approach is that the biotech company contractually involved tends to view its contribution as "key" to any positive outcome and may well sue to enforce payment, such as when Ligand sued Pfizer in 1994 for payments of milestones and royalties related to their osteoporosis screening project . As part of a settlement reached in 1996, Pfizer has given Ligand in excess of $1.3 million in its own stock back at no cost and may make additional payments as certain compounds are developed by Pfizer (detailed in Ligand's 199710K filing).


The pharmaceutical companies fear that some of these platform technologies, such as genomics or high-throughput screening, may become like a computer virus that's difficult to get out of a large R&D organization. As a result, pharmaceutical company negotiators are creating new anti-stacking mechanisms in which there is a ceiling, or maximum royalty, to be paid to all "upstream" licensors by the eventual product marketer. This approach was used in the BMS/Millennium/Affymetrix/Whitehead/MIT consortium for gene chips. A second pharma approach is pay an up front fee and no royalty at all down the road, as appeared in such deals as the Astra/Alanex combinatorial deal for small molecule receptors for pain, or the 1994 gene therapy/genomics collaboration between Genetic Therapy and Human Genome Sciences.

One additional factor worth noting is that if platform technology royalty payments are increasingly being viewed as a finite pie, genomics still appears to be enjoying the biggest slice. That's something of an oddity. In general, the royalty freight paid by pharma to licensors increases as a product moves downstream, (meaning, for example, that deals award higher royalty rates on Phase III compounds than on preclinical stage compounds). In light of that, one might have expected that screening and combinatorial chemistry deals would bear higher rates than genomic deals, since both of these platforms are downstream of genomics. In fact, the rates for screening deals and genomic deals are about the same and both types are higher than for combichem deals. Plus, at least the first wave of genomics deals (HGS, Myriad, Millennium) have better protection against stacking credits than do the screening deals as a group.

[This slide shows types of anti-stacking provisions used in a sampling of screening, combinatorial and genomics alliances (the genomics sample includes 18 Incyte deals and four GI DiscoverEase deals, none of which have anti-stacking provisions). For definitions of anti-stacking types, see below.]

Edward Penhoet, vice chairman of Chiron, notes that one of biotech's "biggest challenges is to justify stacking" in light of myriad innovations emerging. However, as Penhoet also points out, the problem of too much good innovation is a much better problem for Big Pharma to wrestle with than too little. "The system is in danger of breaking down if we slice out people who make big contributions early on," he warns.