Pharmaceutical royalties in licensing deals: No place for the 25 per cent rule of thumb

Abstract

The 25 per cent rule of thumb is often quoted in the context of licensing royalty rates and, in particular, when deriving an appropriate rate of income due to a licensor for an individual asset. We have set out to conduct an in-depth analysis of historic market data from the pharmaceutical industry going back over 10 years to check on the validity of this concept and found little if any evidence of its use, appropriateness or relevance. An abundance of anecdotal references and attempts can be found to make deal making data fit this incongruous notion, and which does not have a sufficiently robust foundation to make its utility appropriate in the pharmaceutical and biotechnology sector. In this paper we review available data and present the case that the use of the 25 per cent rule is at best problematic and at worst inappropriate and misleading to the pharmaceutical and biotechnology industry. We look at the basic principles of value as they apply to the industry's intellectual property. Our conclusion shows that this rule has no suitable place in the arsenal of the thinking licensing executive.