How can healthcare and life sciences businesses safeguard revenue?

In the healthcare and life sciences industry, intellectual property (IP) is a crucial asset. Patents for groundbreaking drugs, medical devices, and technologies are at the core of a company’s value proposition. Licensing agreements, which allow others to use or commercialise these innovations in exchange for royalty payments, play a central role in generating significant revenue streams. 

However, despite the immense value of these licensing arrangements, healthcare and life sciences companies often encounter a major challenge: inaccurate royalty returns.

Inaccurate royalty payments, whether due to misreporting, underreporting, or incorrect royalty calculations, can result in substantial financial losses, regulatory risks, and missed opportunities for reinvestment in research and development (R&D). This article delves into the impact of inaccurate royalty returns in this industry, the causes of these inaccuracies, and why regular licensing reviews are vital for protecting and maximising IP value.

Why are royalty licensing reviews in healthcare and life sciences important?

Given the complexities of licensing agreements and the high stakes involved, regular royalty licensing reviews are critical for healthcare and life sciences companies. A comprehensive review process helps identify errors, ensure compliance, and optimise royalty returns. 

Regular reviews will help identify and correct inaccuracies in royalty returns, ensuring IP holders receive the full financial value of their assets. This is especially important in life sciences, where revenue from licensing deals is often reinvested in future R&D, clinical trials, and product development.

The healthcare industry is highly regulated, and regular reviews of royalty agreements ensure that companies remain compliant with ever-changing laws and regulations. Licensing reviews also help ensure that terms reflect new regulatory requirements and that all necessary reporting is accurate and complete.

Moreover, licensing reviews provide an opportunity to reassess and optimise existing agreements. If a product is performing better than expected, it may be time to renegotiate terms, increase royalty rates, or expand into new markets. A regular review process helps businesses adapt to changing market dynamics and capitalise on new opportunities.

Importantly, a comprehensive review process often includes auditing royalty payments, which helps identify discrepancies early. By regularly auditing royalty payments, businesses can avoid the legal risks associated with underreporting or misreporting royalties and prevent costly disputes with licensees or regulatory authorities.

The complexities of royalty licensing in healthcare and life sciences

Royalty licensing agreements in the healthcare and life sciences sector are often more intricate than in other industries. The complexity of these deals increases the risk of inaccuracies within royalty returns. Some factors that contribute to these complexities include:

Multiple stakeholders

Healthcare and life sciences licensing deals often involve multiple stakeholders, including but not limited to, research institutions, universities, biotech companies, and pharmaceutical giants. Each stakeholder may have its own set of terms, payment schedules, and rights relating to the IP. Managing the revenue flow and ensuring accurate royalty calculations across multiple parties adds layers of complexity.

Milestone payments and tiered royalties

Royalty agreements in life sciences frequently include milestone payments (eg payments tied to clinical trial phases, regulatory approvals, or sales targets) and tiered royalty structures based on sales volume or market share. These arrangements require careful monitoring and reporting to ensure compliance and that payments are calculated accurately at each stage of product development or commercialisation.

Geographic and market variability

Licensing agreements in life sciences frequently span global markets with differing regulatory environments, pricing structures, and royalty rates. Currency fluctuations, cross-border payment issues, and regional differences in the valuation of products can lead to discrepancies in royalty returns. Additionally, the application of royalties across multiple regions or territories can be confusing and difficult to track.

Complex sales channels

In healthcare, products may be sold through multiple channels, such as direct sales, third-party distributors, or government agencies. Each of these sales channels may have different reporting standards, making it more challenging to track sales figures accurately. Inaccurate reporting from distributors or miscalculations in sales volume can result in errors in royalty returns.

Regulatory and compliance factors

The healthcare and life sciences industry is subject to a constantly evolving regulatory landscape. Licensing agreements must be structured in compliance with relevant laws, including those related to IP, drug pricing, and international trade. Failure to update agreements to reflect new regulations or incorrect reporting of compliance can lead to discrepancies in royalty payments.

Inaccurate royalty returns in healthcare and life sciences

Several factors may contribute to inaccurate royalty returns in the healthcare and life sciences industry. Common causes include:

• Inconsistent or lack of reporting: Inconsistent or inaccurate reporting from licensees is one of the leading causes of royalty discrepancies. Licensees may fail to report all sales, misapply royalty rates, or provide incomplete data. In the absence of proper reporting systems or internal controls, errors are more likely to occur.
• Complex payment calculations: The complexity of royalty structures—especially those involving multiple milestones, tiered royalty rates, and different payment schedules—can result in miscalculations. Without clear processes in place to track these variables, companies can inadvertently miss out on revenue or miscalculate royalty payments.
• Currency and exchange rate fluctuations: International licensing deals often involve the conversion of currencies, which can lead to discrepancies in the payment amount due to fluctuating exchange rates. If companies do not track currency conversions accurately, royalty payments may be incorrect, affecting both the IP holder and licensee.
• Changes in market conditions or product use: The commercial performance of healthcare products can change over time due to shifting market conditions, new competitors, or changes in product use. If these shifts are not reflected in the licensing agreements (such as an increase in product demand or changes in patient populations), royalty returns may not align with the product’s actual commercial success.
• Inadequate internal controls: Many healthcare and life sciences companies lack the internal controls necessary to thoroughly track and analyse royalty returns. Without automated systems, dedicated teams to verify payments, or access to the necessary detailed information, companies may overlook discrepancies or fail to notice errors in reporting.

How we can help

At RSM, we work with a broad range of healthcare and life sciences organisations to conduct comprehensive royalty licensing reviews.

Through our industry knowledge and expertise in IP, licensing, and healthcare regulations, we understand complex agreements and can ensure that royalty returns are accurately assessed and compliant with all relevant laws.

We can conduct thorough reviews of past royalty payments, identifying discrepancies and ensuring that all contractual obligations are met. We can also review sales data, marketing reports, and milestone achievements to ensure that payments are and will continue to be accurately calculated.

For international licensing deals, we support our clients with currency conversion issues, international tax considerations, and the complexities of cross-border agreements. We can ascertain if royalties have been paid in the correct currency and in full compliance with local regulations.

By performing detailed royalty reviews, we can help companies identify potential risks early, allowing them to address discrepancies or instances of non-compliance before they escalate into legal issues.

For support with royalty licensing reviews for your healthcare or life sciences business, please contact Catherine Keenan, Graham Bond or Laragh Jeanroy.