IP Valuation for the Preservation of Public Health: Managing IP in the Age of COVID-19

Certainly, patents that read on a potential cure for COVID-19 deserve special treatment. After all, the cure for COVID-19 is not only crucial to save lives all over the world, but also to avoid the collapse of the global economy. Yet, what such special treatment might look like and how special a treatment is necessary is where opinions diverge. In the United States, activists demand that the government should have the rights to the anti-retro viral drug, ‘Remdesivir’. The Open Covid Pledge proposes that all IP related to COVID-19 should be made freely available. Its founding adopters were technology companies such as Facebook, Microsoft, Intel, IBM and Amazon. In contrast, among pharmaceutical companies, the idea of giving up all related IP for free has been viewed critically.

With this in mind, the question is therefore not whether patents related to COVID-19  should be given away for free or not, but rather how the profit motive can be managed in public- private partnerships for the benefit of public health.

Public-Private Partnerships for Health

Universities are often the source of valuable IP that is later on picked up by pharmaceutical companies.

To turn potentially valuable patents into medications and vaccines, universities need the support of companies. A university cannot take the leap from academic research to vaccine production on its own. The mechanisms provided by corporations allow to turn potentially valuable IP into products. It is only with the support of a company that original ideas of academics can be turned into solutions that serve the public health. Often, universities pass on these patents to the private sector through a licensing agreement.

Pharmaceutical companies that ultimately bring vaccines and medications to the market are subject to market forces. They need to assure they stay profitable; they are forced to address competitive market dynamics and need to ultimately assure their products meet demand. While without a doubt, a pharmaceutical company has an equally important responsibility to preserve the public health, it also must remain profitable, quite simply, because it is a business.

Managing the Profit Motive in Public-Private Partnerships

Managing the profit motive in such public-private partnerships remains a delicate balancing act. Coming to grips with the need to preserve public health, while giving companies a chance to be profitable, has many facets. At present, a binary approach prevails that either results in passing on IP for free  or commercializing the IP to the fullest extent possible. I think there can be a middle ground between the two that has so far gone unnoticed.

I call this IP management for public health. It allows pharmaceutical companies to remain profitable while also ensuring access to public health for all. Here I will focus on two aspects: the terms of a licensing agreement and the royalty rate agreed in a licensing agreement.

The terms of a licensing agreement can contain clauses that help ensure public health. A good example here is the technology transfer agreement that Yale University concluded with Bristol Myers Squibb. The university insisted that patients in Africa would have access to medication potentially resulting out of the technology transfer.     

The other aspect, which I am more familiar with, pertains to the determination of a royalty rate. Royalty rates can be determined with the support of a host of different valuation methods. One can look, for example, at the incremental value that the patents bring to the technology, what royalty rates similarly situated patents have been able to fetch in the market, or one can critically assess a royalty rate while keeping the cumulative royalty stack in mind. These are just a few examples, and the list is not exhaustive.

Licensing Rate Determination for Public Health

The incremental value approach is keen on encapsulating the worth a patent brings to the technology in comparison to the value added that is derived from other factors, such as, for example, a firm’s own marketing efforts. The approach has been used by courts to determine royalty rates. In the United States, it is commensurate with the Georgia Pacific Criteria.

If this reasoning is applied to the question of how to assure public health, then the determination of the rate is not based on its relationship to profits, but on its relationship to preserving public health. The approach and reasoning remain the same, but rather than looking at turnover, revenues etc., one looks at the ability to preserve lives for patients in need.

Similarly, the approach to determine a royalty rate on the grounds of a comparison can be approached from a public health perspective. Here, one will need to spend time to find comparable licensing contracts that reflect the need to preserve health for all. The deal already mentioned with Yale University could, for example, serve as a blueprint.

It is furthermore helpful to verify that the cumulative royalty stack a licensee may be facing allows it to remain profitable. Here, one can undertake calculations that allow us to understand what a cumulative licensing rate, even if hypothetical, would look like. Such calculations occur regularly in licensing rate determinations. Translated to the need to preserve public health, such questions become even more important, as a pharmaceutical company that is focused on the goal of preserving public health will not reach the same profit margins as a company that is merely eager to make as much money as it can.

Takeaway

Equipped with such a nuanced understanding of how to approach licensing contracts and licensing rates, there are strong chances to better meet the need to preserve the health of all. It clearly offers a third option over the current binary approach to patents, where patents are either given up for free or commercialized to the best extent possible. Licensing strategies like these should be further explored and new ideas should be promoted that allow us to bridge corporate interests with public needs.

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