When and How to Monetize Your IP




by Selling Your Royalty Stream

Louis P. Berneman Christopher T. Cox 1

Louis P. Berneman, EdD, CLP

• • • • • Managing Director of Texelerate, LLC, a tech transfer consultancy – Cowen Healthcare Royalty Partners – Osage University Partners From 1995 to 2005, Lou was the Managing Director, CTT at U Penn Past President of AUTM and former officer and trustee of LES Lou has founded technology-based entrepreneurial ventures and a new venture fund (Osage), serves as an expert witness in IP litigation, published articles, and been a frequent speaker Lou received his undergraduate degree from Penn State, a teaching credential from University of California, Santa Barbara, and masters and doctoral degrees from Columbia University 2

Christopher T. Cox

Chris represents clients in a wide array of corporate and financial matters, with particular emphasis on mergers and acquisitions and corporate governance. He has represented public and private acquirers, targets, investment banks and private equity sponsors in connection with negotiated mergers and acquisitions, restructurings, joint ventures and proxy contests. He has also represented foreign and domestic entities in many aspects of cross-border business transactions. Chris counsels clients on a broad range of corporate, securities and business related matters and matters affecting corporate policy and strategy, including directors ’ duties and responsibilities and other aspects of corporate governance, disclosure issues, corporate compliance matters, issues related to Sarbanes-Oxley compliance and financing transactions. He is recognized for his work in Mergers, Acquisitions and Buyouts by The Legal 500.

Chris received his undergraduate degree from the University of Missouri in 1987 and his J.D. in 1992 from the University of Missouri - Columbia Law School where he was a member of the Missouri Law Review.

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Agenda

• •

Prepare for the institutional decision making process:

–

Threshold Considerations

–

Preparatory Due Diligence

–

Stakeholders’ Interests

–

Review and Approval Process

–

Selecting Advisors

Review the key components of a monetization transaction:

–

Most Active Investors (Buyers)

–

Key Investment Criteria

–

Valuation Issues

–

Transaction Structure and Timing

–

Due Diligence Process

–

Transaction Documentation

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AUTM Journal

Tomorrow

’

s Technology Transfer

Volume 1, Number 1 Fall 2008

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Royalty Monetization

Royalty Monetization

Academic Institution License Agreement IP $ Royalties $ Milestones Pharma Company

A transaction that involves converting all or a portion of an IP asset that is expected to generate a stream of future income into a present lump sum and/or other contractually obligated payments

Royalty Monetization Academic Institution License Agreement IP $ Royalties $ Milestones Pharma Company Royalty Investor

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Threshold Considerations

• • • • • Royalty monetization should be a post-license value creation strategic consideration – 30+ transactions in recent years; ~$4 billion realized Do you have a royalty stream to monetize?

What, when and how to sell?

Which stakeholders are interested?

– What are their needs/wants?

Institutional approval players and process 7

University Stakeholders

• • Beneficiaries of License Income under Patent Policy – Deans/Department Chairs/VPR/University – TLO – Inventors (personal share) / Inventors (lab share) Administration – TLO – Finance and Administration – General Counsel – Trustees/President/Provost 8

Institutional Deal Team

• • • • Business (Tech Transfer) Legal (General Counsel) Financial (EVP F&A) Outside Advisors – Legal (counsel with structured finance expertise) – Forecast (business consultant re valuation model) – Financial (bankers) 9

Pros of Monetization

• • • • • Convert long-term cash flows into current capital Mitigate risks (diversify) and re-invest/re-deploy – If you’ve been good/lucky enough… Market recognition of an academic achievement Flexible deal structure to achieve goals Transactions may be structured to preserve upside for seller 10

Cons of Monetization

• • • • Possible discount in value Transaction costs – Financial – Opportunity (time and energy) Depending on deal structure, potentially giving up a long term income stream Perception – reduced confidence in the underlying product 11

Preparing for the Deal

• • • • • • Due Diligence (anticipate and address issues likely to be of concern to buyers) Analyze license agreement and patents Valuation model Seek stakeholders’ interest/commitment Determine institutional approval process and authorization Specify goals and objectives (needs/wants) 12

Due Diligence

•

License Agreement

− What is licensed and what do applicable patents cover − Royalty basis, rate and duration − Net Sales definition − expenses, settlement costs, tax withholding, payment clawbacks) − Royalty payment offsets (e.g., patent prosecution and enforcement Assignability – −Confidentiality obligations (e.g., ability to disclose license agreement, royalty reports and other relevant information) – −Termination rights and events – −Clarity of key terms •

Patents

– −Patent prosecution history and validity (strength of protection) – −Patent term, opportunity for extension •

Market/Product

– −Revenue projections and risks – −Competition and generic challenges – −Regulatory risks and other obstacles to commercial success 13

Risks Around Forecast Revenue

$60

OUTPERFORM

$50 $40 $30

BASE CASE DELAYED LAUNCH SLOW LAUNCH UNDERPERFORM

$20 $10 $0 2006 2007 2008 2009 2010

Year

2011

PULLED FROM THE MARKET

2012 2013 2014 2015 14

If They Only Knew…

• • • 1991 MSKCC and Amgen re Neupogen • Before Andy Maslow and before an efficient market 2005 Emory, RP, and Gilead Sciences re Emtriva 2008 Childrens Hospital of Philadelphia re rotavirus vaccine RotaTeq (Merck) •

Inventors have caught on…

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Timing Risk: BMS – Zerit

® Approved in 1994 for the treatment of HIV/AIDS July 2000 -Yale University sold 70% of its royalty on Zerit for $115MM

$900 $800 $700 $600 $500 $400 $300 $200 $100 $0

Black Box Warning 01/05/01: BMS issued a letter to alert health care professionals to the potential increased risk of fatal lactic acidosis and liver damage in pregnant women treated with the combination of Zerit and Videx

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: BMS historical 10Ks; Washington CORE Mar 2004

Analyst Average 2000 (time of deal) Actual Sales

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Ramp Risk - Cervarix

®

and Gardasil

®

Combined Cervarix® and Gardasil® Sales Projections ($MM)

$6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0

High Expectations Commercial Reality Sets In Valuation Gap

2006 2007 2008 2009 2010

Analyst Average (Dec. 2006)

2011 2012 2013

Analyst Average (Jan. 2010)

2014 2015 Source: Equity Research 17

Lesson Learned: Deal Structure Trumps Timing

• • • Conventional wisdom – Monetizing early vs later (approaching peak sales) – Sell the sizzle or steak Why not achieve both?

Virtue of the ‘horizontal strip’ structure 18

Horizontal (Safe) Strip

Investment Date : Committed Amount: Marketer: November 2005 $45 million Merck Product: Indication: RotaTeq Rotavirus Prevention Counterparty: The Wistar Institute 

Situation Overview

Wistar wanted cash to fund expansion and new research projects  mitigated commercial risk

Transaction Structure

 $45 million:  $1 million upfront (pre FDA approval)  $44 million upon US approval  Wistar retains all royalties on sales over $300 million 19

Summary—Threshold Considerations

• • • • • • Assemble the right teams – Inside and outside advisors Understand stakeholders’ goals, needs and wants Prepare (internal due diligence) Consider counter-party risks Simplicity is a virtue

Deal structure trumps timing

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Key Components of a RM Transaction

• • • • • • Most Active Investors (Buyers) Key Investment Criteria Valuation Issues Transaction Structure and Timing Due Diligence Process Transaction Documentation 21

Most Active Buyers

• • • • • • Capital Royalty Cowen Healthcare Royalty Partners DRI Paul Capital Partners Royalty Pharma Licensee/sublicensee (royalty payor) 22

Key Investment Criteria

• • • • • • • Regulatory approval/risk Royalty stream of sufficient size to make transaction cost-effective for both parties Strong IP protection Stable or growing royalty stream through maturity Strong licensee/sublicensee Stable supply source Product well positioned in the market 23

Deal Structure of a Sale

$45 $40 $35 $30 $25 $20 $15 $10 $5 $0

SELL "SAFE TIER" SELL ENTIRE ROYALTY REMOVE ALL RISK RISK SHARING

2006 2007 2008 2009 2010

Year

2011 2012 2013 2014 2015

R I S K

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What Interest is Being Sold?

– – Straight Sale • A sale of all of the royalty interest Structured Sale • All royalties up to a sales threshold (horizontal strip) • % of royalties • Sale up to a cap on payments or investment returns • Sale of royalties of certain products, in certain countries, for a certain period of time 25

Purchase Agreement Considerations

• • • • • Treatment of Payment Stream – Assignment to Buyer – – Remittance by University Lockbox Accounts Scope of License Agreement Information to be Provided to Buyer – Royalty reports – – – Results of audits/inspections Copies of notices/correspondence Treatment of privileged information Amendments/Termination/ Assignment of License – Consent rights of Buyer Allocation of costs/proceeds Allowing for further monetizations – Preservation of rights for future Buyers (in case of partial sale) 26

Purchase Agreement Considerations

• • Audits – Triggering audit – – Selection of auditor Timing of audit/inspection rights – Allocations of costs Enforcement of License Agreement/Patents – – Control over bringing/directing proceedings Choice of counsel – Control over settlements 27

The Auction Process

• • • Confidentiality Agreements with Bidders Process Letter – CDA – – – Information Memorandum – License Agreement – – – Often two rounds of bidding Indications of interest (first round) Binding bids (second round) Royalty reports Draft Royalty Purchase Agreement Independent Consultant ’ s Report (if applicable) 28

Louis P. Berneman, EdD, CLP Texelerate, LLC

2119 Delancey Place, Suite 400 Philadelphia, PA 19103-6511 [email protected]

215-275-8492 phone 888-319-6344 fax www.texelerate.net

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Christopher T. Cox

Cahill Gordon & Reindel LLP Eighty Pine Street New York, NY 10005-1702 212.701.3450 Phone 212.378.2416 Fax [email protected]

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