Glossary

Royalty

Last updated 07 June 2007

Description

Payments made in exchange for grant of rights in the agreement.

Royalties are an ongoing obligation of the licensee to the licensor, continually paid in exchange for an ongoing right.

A royalty is usually expressed as a percentage (%) of the revenues gained from the sale of product/service. Alternatively, a royalty may be expressed as a fixed price per unit of product/service sale, irrespective of sales price, however this approach is generally not accepted by one or other of the parties to an agreement.

A widely used basis for determining the royalty is called the 'Twenty five percent rule', which has been in use for over forty years. In summary, the rule stipulates that the royalty should be set at 25% of the licensee's expected profits for the product or service subject to royalty payments.

The royalty rate is generally set as a consequence of negotiation and agreement between the licensor and licensee, so can be expected to vary from this rule, especially when taking into account other payments such as license fees, milestones and other fees that are written into the agreement.

Any royalty rate expressed in an agreement for press announcement is generally a percentage of net sales. As such, it is difficult to readily determine whether the rate reflects the twenty five percent rule.

It is important to define carefully what is meant by 'net sales' as this will have a significant impact on the likely royalty paid by the licensee to the licensor.

Examples

Clause:

Royalty Payments.

In addition to the payments set forth above, WYETH shall pay to ACCESS a royalty (the "Royalty"), on a country-by-country basis in the Territory, equal to * percent ( * %) of Net Sales of the Product in such country during each calendar quarter (or portion thereof) during the Term (each such period, a "Royalty Period"), commencing as of the date on which the Product is sold by WYETH for the first time to a Third Party for commercial distribution in such country. If, during the Term, in any country in the Territory, (a) another * (other than those containing amlexanox as an active ingredient) for oral pain (excluding sore throat pain) becomes commercially available, which has the same labeling and indications on the Product and which adversely impacts either the sales price or the unit volume by greater than * percent ( * %), or (b) ACCESS exercises its rights under Section 2.2 to convert the exclusive license with respect to a country to a non-exclusive license, then the Royalty with respect to such country shall be immediately reduced to * percent ( * %). Each Royalty will be payable not later than forty-five (45) days following the expiration of each applicable Royalty Period. WYETH shall pay the Royalty with respect to a country that accrues during the Term of this Agreement for so long as the license granted by ACCESS under Section 2.1.1 remains in effect in such country. WYETH will include with each such payment a written report detailing (i) the number of Product units, per country, and the sales price of such Product units by WYETH and its Affiliates; and (ii) Net Sales of the Product during the applicable Royalty Period, all in a manner consistent with WYETH's internal sales reporting. -- License and Supply agreement between Access and Wyeth, January 2004