Provision Database

Issue Introduction: Payment Structures

Payment structure provisions set out the details of the payments that will be made between the parties to an agreement. Appropriate payment structures vary depending on the purpose of an agreement, but some common forms include:

  • Price per unit amounts for supply agreements;
  • Royalties under a license agreement; 
  • A development budget for a funding agreement; or
  • Cost-sharing and profit-sharing arrangements under a collaboration agreement.

The calculation of amounts to be paid under an agreement can be reliant on definitions such as “Net Sales” (the revenue received for sales of a product less certain deductible expenses) and “Cost of Goods Sold”, or “COGS” (the total cost of manufacturing a product before adding a profit margin). These definitions are often similar but not identical between agreements – it is important to ensure that they are reviewed carefully during agreement negotiations.

Detailed royalty rate, pricing and budget data is often redacted in publicly available copies of agreements; therefore, there are limitations on the information that is available in the MAPGuide.

Some agreements include definitions of an “affordable price” and/or specify lower prices for sales to lower income markets. These provisions are reviewed in more detail under Affordable Pricing.

Questions to consider when developing a royalties and payments provision

  • What is an appropriate payment structure for this agreement?

  • What are the mechanisms to limit exposure to additional payments or expenses?

Example approaches found in the MAPGuide

  • What is the payment structure under this agreement?
    • Product supply agreements in the MAPGuide have a variety of pricing terms such as:
      • A fixed price per dose of the product, which could be paid in advance or upon receipt of the goods.
      • A variable price in line with the supplier’s COGS. A mark-up percentage could also be added to this price in order to allow the supplier to make a profit. Some agreements also specify that COGS pricing will be calculated on an “open book basis”, meaning that the supplier provides some transparency over its calculations. These calculations are usually considered highly commercially sensitive.
    • Licensing agreements in the MAPGuide generally include provisions requiring the payment of royalties for sales of a licensed product. Royalties are usually calculated as a percentage of net sales. The royalty rate (percentage) can vary depending on factors such as the customer, product or sales territory.
    • Development funding agreements in the MAPGuide usually include payments from the funder to the product developer up to a specified project budget amount. The payments are often made in line with a defined payment schedule (e.g. one payment per quarter).
    • Collaboration agreements in the MAPGuide often combine a number of different mechanisms for payments to be made between the parties. These mechanisms can correspond to different stages in the collaboration process. For example:
      • At the start of a collaboration, the parties might agree to share their product development costs.
      • If the parties are successful in developing an approved product, then cost sharing could change to sharing the profits made on sales of the product. As an alternative, or addition, to profit sharing, the parties might pay royalties to each other for sales in different countries.
  • What are the mechanisms to control or limit potential exposure to additional payments or expenses?
    • Some of the agreements in the MAPGuide require suppliers or product developers to use their best efforts to mitigate or reduce total costs.
    • The development funding agreements in the MAPGuide generally restrict payments to no more than the agreed project budget, unless an amendment is agreed. These provisions sometimes also specify that the product developer will only be reimbursed for actual costs incurred (i.e., if the developer does not spend all of the budgeted funds on project-related activities, they will have to return the remaining amount).