If you have discovered a treatment, drug, or technology that you can’t afford to develop and commercialize, you can still license the innovation to another organization. Here are three key statistics on healthcare licensing arrangements.
1) Most licensing payment arrangements are structured as a percentage of sales [i]
Life science industries use royalty structures as a percentage of sales for the vast majority of licensing deals. Only a small percentage of licensing arrangement are structured as a fixed amount per unit-sale or a lump sum payment.
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Proportional Mix of Licensing Compensation Models by Industry |
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| Compensation structure | All industries | High-tech industry | Life sciences industry |
| Percentage of sales | 91% | 81% | 95% |
| All others | 9% | 19% | 5% |
2) Royalty rates increase with advancing stages of development [ii]
Data shows some biopharmaceutical licensees are willing to pay royalty rates nearly three times higher for innovations which have demonstrated successful clinical trials (i.e., proof of concept) when compared to early stage discoveries. Innovations with evidence of medical efficacy have stronger postures for negotiating higher royalty rates.
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Stages of Development |
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| Pre-Clinical | Pre-Proof of Concept | Post-Proof of Concept | Registered / Marketed | |
| Average royalty rate | 4.5% | 6.3% | 14.0% | 14.6% |
| Deal sample (n) | 27 | 6 | 5 | 7 |
3) Pharmaceutical royalties can tier upward with sales, while most others tier down [i]
Most non-pharmaceutical licensing arrangements negotiate decreasing royalty rates as total sales increase. However, over half of pharmaceutical licensing arrangements use compensation structures with royalty rates that increase with higher levels of sales. This phenomenon may be a function of licensees’ preference to defer royalty expenses in light of high upfront costs incurred by licensees during the first few years of a new drug’s launch.
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Proportion of License Arrangements by Royalty Structure |
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| Industry | Royalty rates increase with higher sales | Royalty rates decrease with higher sales |
| Pharmaceutical | 64% | 36% |
| All others | 12% | 87% |
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