Determining a Royalty Rate-an Example

• Author: Russell L. Parr
• Profession: President of Intellectual Property Research Associates
• Pages: 291-304

CHAPTER 18

DETERMINING A ROYALTY

RATE—AN EXAMPLE

The purpose of this chapter is to present an example of how the methods discussed in previ-

ous chapters can be used to establish a royalty rate range for use in licensing negotiations.

The example presented is for illustrative purposes only.

Assume for this example that a hypothetical company, CutEdge Medical Technologies,

Inc. (CMT), owns a patented technology regarding living tissue heart valve replacements.

Assume further that CMT has developed an insertion method using a balloon catheter sys-

tem eliminating the need for open-heart surgery. CMT has perfected the technology and

has obtained FDA approvals for this groundbreaking new product. CMT has changed its

strategy and wishes to focus its efforts on other products. CMT has decided to license the

technology to a third party.

HEART VALUE REPLACEMENT BACKGROUND

The human heart has four valves. These valves close to keep blood from returning to the

upper or lower heart chambers once it is pumped out of a chamber. Assuming a lifespan of

85 years, the heart valves will open and close almost 4 billion times. Consequently, heart

valves are subject to wear and tear. Over time, valves can begin to leak or can thicken,

causing a narrowing of the valve opening. Replacement is required in either case.

Replacement of heart valves has required complex open-heart surgery and insertion of

one of three products: (1) mechanical valves, (2) porcine (pig) valves, or (3) bovine (cow)

valves. All have disadvantages.

The mechanical valve is a ball and cage and requires a lifetime of blood thinner medi-

cation. They are also noisy, causing great annoyance to some patients. Some patients have

even undergone a second open-heart surgery to replace the mechanical valvewith a porcine

or bovine valve to rid themselves of the noise caused by mechanical valves.

Porcine and bovine valves are made from a pig or cow heart valve resembling human

valves. However, they are created from dead tissue that has been preserved and treated so

the human body will not reject them. Unfortunately, these valvesdegrade over time. Natural

human valves are living cells that can help the valveheal, recover from day-to-day use, and

resist degradation.1

1Background information source:T. Jared Bunch, MD, “Heart Valves of the Future: Alive, Self-Healing,” http://

www.everydayhealth.com/columns/jared-bunch-rhythm-of- life/an-alive-self-healing- heart-valve-that- does-

not-require-open- heart-surgery-the-future- of-heart-valves-maybe- here/

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