Tiered royalty rates
Sales bands, marginal rates, step-down, royalty term.
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: tiered royalty rates.Updated 5 November 2026
Part of healthcare financial models, with the models, labs and guides around it.
What it does
The calculation at the centre of every drug licence. Each year’s net sales are split into bands: the sales up to the first threshold earn the first rate, the sales between the thresholds the second rate, and only the sales above the top threshold the top rate. The bands reset each year and always add back to net sales, so the effective rate rises smoothly with sales. Many licences then cut the rate once generics enter, and every royalty ends with the royalty term, at the expiry of the last patent the licence names.
Where it lives
The same schedule in each model that carries it, with the rows to open. Open a model in the browser, go to the sheet, and click the lines.
- Products, rows 21–27: Last year of the royalty term, Top of tier 1, annual net sales, Top of tier 2, annual net sales, Tier 1 royalty rate…
- Product A, rows 18–26: Sales in tier 1, Sales in tier 2, Sales in tier 3, Royalty at the contract rates…
- Product B, rows 18–26: Sales in tier 1, Sales in tier 2, Sales in tier 3, Royalty at the contract rates…
- Product C, rows 18–26: Sales in tier 1, Sales in tier 2, Sales in tier 3, Royalty at the contract rates…
- Product D, rows 18–26: Sales in tier 1, Sales in tier 2, Sales in tier 3, Royalty at the contract rates…
What a reviewer looks for
- The top rate applied to all sales once its threshold is crossed.
- Tiers measured on cumulative rather than annual sales.
- The royalty carried past the end of its term, or stopped at generic entry when the term runs on.
Learn it, then build it
Vocabulary: Tiered Royalty.