There are no prizes for the observation that many biotech patent licence agreements provide for royalties to be payable by the licensee on "Net Sales" of "Licensed Products". However, is the royalty payable on Licensed Products which were manufactured during the term of the licensed patents for the purposes of stockpiling and security of supply, but not sold until after patent expiry? In other words, when does the royalty payment obligation on a Licensed Product actually accrue?
This is the question currently before the California courts in Genentech v Biogen and Genentech v Millenium.
These disputes bring into sharp focus this crucial issue, which is often neglected when drafting biopharma licences. As will be seen, it can have a substantial impact on overall deal value and should be on the checklist of every Biopharma BD team (and their legal counsel).
Genentech's licensing programme for the Cabilly patents
The litigation centres around the famously long-lived "Cabilly" patents, which covered crucial steps in the commercial-scale production of therapeutic antibodies. Due to a quirk of US law, the last of these patents expired in December 2018 (35 years after their earliest priority date).
The Cabilly patents were co-owned by City of Hope and Genentech. Genentech had exclusive control over licensing to third parties and took a strategic decision to license them to other antibody drug manufacturers. As a result, they became among the most widely-licensed patent families in the biotech industry. In 2018 alone, they were estimated to have generated $1bn in royalties for Genentech and City of Hope (with Genentech's share exceeding $600 million).
Genentech brought proceedings in 2023 against Biogen in the Federal District Court for the Northern District of California, and against Millenium in the Superior Court of California (San Mateo County) for breach of contract, claiming unpaid royalties under its Cabilly licence agreements with those manufacturers. The claims are still pending.
The claim against Biogen concerns its licence from Genentech for Tysabri™ (for the treatment of multiple-sclerosis and Crohn's disease). Tysabri's active ingredient is natalizumab, a humanized monoclonal antibody that binds to the protein known as Alpha 4 integrin. Genentech and Biogen entered into the licence in 2004 (shortly before the FDA granted BLA approval for Tysabri™). Biogen paid substantial quarterly royalties to Genentech from 2005 until March 2019, when it made a final payment in respect of the final quarter of 2018 (up to 18 December, when the last of the Cabilly patents expired).
Genentech alleges that it is customary for biopharmaceutical companies that make and sell therapeutics antibodies to stockpile at least several calendar quarters worth of product, and often more than that. On this basis, it alleges that most if not all of the Tysabri that Biogen sold in 2019 contained natalizumab which had been made or imported into the US prior to the expiration of the Cabilly Patents. Biogen admits this is the case, but denies any obligation to pay royalties in respect of such sales. Biogen's position is that, properly construed, it is clear from the terms of the licence agreement that the parties agreed that royalty payments would end upon expiry of the Cabilly Patents.
The licence agreement
According to the licence agreement (section 3.03), Biogen agreed to pay Genentech a mid-single-figure (ie approx. 5%) royalty on "all Net Sales of Licensed Products sold in the US" and a lower royalty on "Net Sales of all Licensed Product sold" throughout the rest of the world.
"Licensed Products" was defined as "any antibody that binds specifically to Alpha4, the making (or having made), using, selling, offering for sale or importing of which, but for the license granted under this Agreement, would infringe a Valid Claim of a patent included in the Licensed Patents".
"Licensed Patent " was defined to include various Cabilly patents, the last to expire of which expired on 18 December 2018.
Curiously, Genentech's Complaint does not refer to the "Term and Termination" provisions in the Biogen licence, which might also be highly relevant.
Assuming these follow the corresponding provisions in other Cabilly licences which have over the years been disclosed publicly, we expect the "Term and Termination" provisions to be in the following terms (or similar):
"Term. The term of the agreement commenced on the [Effective Date] and remained in full force and effect until the expiration of the last patent within the Licensed Patents, unless earlier terminated in accordance with this Agreement."
"Effect of Termination. Termination of this Agreement in whole or in part for any reason shall not relieve Licensee of its obligations to pay all fees and royalties that shall have accrued hereunder prior to the effective date of termination… [Various obligations were specifically identified as surviving termination, but the royalty payment obligation in section 3.03 was not one of them]."
There is nothing unusual or surprising here - this is a standard approach to defining the term of a patent licence, and the effect of termination.
It follows that Biogen's Cabilly licence agreement would have terminated on 18 December 2018. This supports Biogen's position that all payment obligations terminated on 18 December 2018.
However, set against this, the wording of the "Effect of Termination" clause raises a question as to when the royalty payment obligation in respect of any given unit of Licensed Product actually accrued. There are two possible approaches to licence interpretation on this issue:
- The royalty payment obligation accrued at the point of sale of the unit. In this case, termination of the licence agreement on expiry of the last Licensed Patent would mean that no royalties are payable on Licensed Product sales after patent expiry (consistent with Biogen's position).
- The royalty payment obligation accrued at the point at which the unit first became a Licensed Product (ie by virtue of it being made, used, sold, offered for sale, or imported in a manner which fell within a Valid Claim of a Licensed Patent), with the calculation of the amount of royalty payable being deferred until subsequent sale (at which point the amount of the royalty payable is "metered" or calculated by reference to the net sale price).
Genentech alleges that whilst pending disclosure it does not know the size of Biogen's stockpile as of 18 December 2018, it believes based on its industry experience that it is owed tens of millions of dollars in unpaid royalties and interest. The basis for this belief can readily be seen from a quick consideration of publicly available information in Biogen's Form 10-K annual reports. Global sales of Tysabri in 2019 were c. $1.7 billion, approximately 50% of which were in the US. Even ignoring the royalties due on sales outside the US of product manufactured by Biogen at its US manufacturing facility at Research Triangle Park, a 5% royalty on sales of $850 million would amount to $42 million (plus contractual interest at 2% over prime rate over 5 years, which could amount to a further $4 million).
Genentech's claim against Millenium Pharmaceuticals is in almost identical terms, save that it relates to Mlillenium's Cabilly licence in respect of Entyvio™ (for the treatment of severe ulcerative colitis and Crohn's diseases). Entyvio™'s active ingredient is vedolizumab, a humanized monoclonal antibody that binds to the MAdCMA-1 protein. Millenium entered into its Cabilly licence in May 2004, in anticipation of FDA approval and commercial sales of Entyvio™ (which was ultimately received in May 2014). Millenium made its last royalty payment on 28 February 2019 for net sales of Entyvio in the final quarter of 2018, but did not include royalties on any Net Sales which occurred after 18 December 2018. Global sales of Entyvio™ in 2019 were $3.1 billion (significantly higher than Tyasbri sales in the same period). Genentech estimates the unpaid royalties at not less than $80 million.
So what?
Whilst in this case this issue has arisen in respect of patent licence agreements drafted in a US-style, and governed by Californian law, it is highly relevant for all biotech CEOs, CFOs and BD teams regardless of location. Exactly the same issue could arise under an English-law patent licence agreement.
Questions of the correct interpretation of a patent licence agreement are fact-dependent, and are resolved applying the rules of the applicable law of the contract (here Californian law). So the outcome in these disputes will not necessarily apply to another patent licence agreement. However, it is still likely to be an instructive decision for the biotech licensing community, even outside the US. We are following the progress of the claims and will report on the outcome – it is definitely one to watch.
In the meantime, best practice would be to address this issue expressly in the licence agreement, so that it is completely clear. Curiously, this is often not done, even in an otherwise well-drafted form agreements and templates. So it would be well worth checking the position on this point in your templates and existing material partnering agreements, and considering whether they need to be overhauled.
Please get in touch, or reach out to your usual TW contact, if you would like to discuss any of these issues.
Genentech Inc v Biogen Inc, Case No. 3:23-cv-909, US District Court Northern District of California.
Genentech Inc v Millenium Pharmaceuticals Inc, Case No. 23.CIV-00924, Superior Court of the State of California (San Mateo County).
Millenium Pharmaceuticals Inc was renamed Millenium: The Takeda Oncology Company following Takeda’s $8.8bn acquisition of Millenium in 2008, with the name subsequently being simplified in 2013 to Takeda Oncology Inc.
The authors would like to thank Elizabeth Robson for her assistance with this note.
An expanded version of this note appeared in the BioScience Law Review, Vol 19, Issue 5 under the title "The Cabilly antibody manufacturing patents: the gift which keeps on giving (even after 41 years….)"
