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January 3, 2000

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Subject:  Will CRA's licensing maximize revenue?
Author:  ElricSeven

One of the most difficult concepts that I am trying to get a handle on is how CRA will maximize its revenue from any patents it does get.

The pharmacogenomics industry is presented with a huge problem in that a single drug or treatment may use several patented genes. The entities that own these genes (CRA, HGSI, INCY, etc.) each have different interest and approach to licensing. These differences may result in huge transaction costs that chill the willingness of the pharmas to perform more R&D. One company could hold out - like the old lady that owns a tiny house in the center of a critical real estate development - and cause massive headaches for the pharmas.

The area of greatest conflict, that I can tell, is between those that use "reach through licensing", or RTL and those that don't. RTL is where the owner of the patent insists on the assignment of a percentage of the revenue generated from any particular invention that is developed using their patented invention. For instance, ABC genomics develops a patented mouse that has certain genetic characteristics. This mouse is used to test and develop a drug XYZ by ACME pharma to treat those characteristics.

ABC's license for use of the mouse (or cell line, etc.) includes a requirement that 5% of the profits from drug XYZ be paid to ABC. The problem is that ACME's development may have used dozens of tools with RTL's and they are left with next to nothing in the way of profits, e.g., 20 RTLs at 5% is 100%. This form of licensing has been used before in the polymer industry for rubber and other things. What resulted was a definite chilling of research in the area.

" overall concern is with how CRA will balance its revenue from patented genes with the public interest in promoting research."

Add the transaction costs of negotiating multiple licenses for different gene patents and the insistence of some companies on RTLs and its a big costly mess. I was told during the tour that CRA was NOT going to use RTLs. I can't decide whether I am happy with that or not. On the one hand, 1,000 licenses at $100 per license is worth more than a one RTL that doesn't work out. But, one RTL can be worth more than a massive number of cheap nonexclusive licenses.

Perhaps something can be developed similar to what ASCAP does with copyrights of musical works. ASCAP is the agency that, for monthly fee based on the number of customers, size of establishment, etc., allows one to play ANY of the songs to which it has the right. Maybe CRA, HGSI, INCY and others can get together and form an agency similar to ASCAP - "GENECAP?" - allowing free use of the collective whole of patented genes. This would promote easy research while compensating the owners of those patents proportional to the number of patents owned, frequency of use etc.

In summary, my overall concern is with how CRA will balance its revenue from patented genes with the public interest in promoting research. Also, will other the insistence of other genomics companies on using RTL ruin the party for everyone? Perhaps the scariest thing of all, will just the cost of negotiating with all of the gene patent owners be such a "turn off" that pharma research will get stuck in the mud? As far as I can tell CRA profits are directly proportional to the amount of money that is being spent on research.

Anyone have any thoughts, or will this message pass unnoticed due to an outbreak of Y2K hangover syndrome?


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