ip exploitation strategies and best practices for the current economy

IP Exploitation Strategies and Best Practices for the Current Economy

Chicago Bar Association – Intellectual Property Law Committee

April 27, 2010

Rick Nathan, ASA, CFAThe Sorbi Group, LLC

Closely held company holding patents and technology related to a unique lipid complex, which enables fat and pharmaceutical therapies, for example, to be absorbed directly into the body from the intestines and into the lymphatic system, and enables enhanced absorption through the skin or into skin cells, and by inhalation of various formulations

Consider multiple investment strategies including vertical integration, sale of assets (patents and technology), licensing certain rights, or other

Provide guidance on a suitable value proposition

April 27, 2010 © 2010, The Sorbi Group, LLC 2

Case Study

Within the context of today’s economic hardship:

How to better align IP management with associated business lines?

How to establish a successful and clarified licensing campaign?

What other exploitation structures should be pursued?

How will a changing political/regulatory framework affect my strategies?

What valuation techniques should be relied upon and how?


What are the Questions?

The notion of price versus value

The notion of risk versus uncertainty

The notion of measurement versus communication

How should valuation techniques be relied upon


Critical Differences Today

Price reflects what is paid. Value reflects what is received, and reflects intrinsic economic worth

Price reflects a market exchange process - Value reflects utility

When you make the assumption that price and value are equivalent, then any focus on cutting costs to reduce prices often results in similar reductions in the very level of service or product the end-user requires

The “value” of IP needs to reflect its value-in-use, not its value-in-exchange

Today’s economy obscures value even more due to greater asymmetric information


The notion of price versus value


A Rubric for Value-In-Use

Intellectual

Property

YES YES YES YES

NO NO

YES

NO

YES

License to Outside Parties Joint Venture

YES

YES

Vertical Integration

Are complement

assets available in

house?

Is there demonstrated

leadership?

Can complement

assets be obtained?

NO

Can

market leadership

be secured?

NO NO NO

NO

Is there adequate return for the risk?

Value chain decoupling

Is the IP adequately protected?

Does the IP meet a

market need in

line with firm

strategy?

Store or Dispose

Can the IP be

adequately protected?

Differentiating risk from uncertainty is critical for companies to more clearly communicate their value proposition

Risk represents the chance of loss, is determinate, and thus presents foreseeable consequences - mathematical probabilities can be applied

Uncertainty results when randomness cannot be expressed in terms of probabilities

Today’s uncertainties reflect political/regulatory, economic, and financial unknowns

Bottom line Risk can be monetized, uncertainty cannot. The commingling of risk and uncertainty widens the “price-value spread.”


The notion of risk vs. uncertainty


A Rubric for Risk “Decisioning”

Vertical Integration Business Unit A

Field of Use 1

Complementary LicensingStrategic Partner A

Vertical IntegrationBusiness Unit B

Field of Use 2 Vertical IntegrationBusiness Unit C

IP Rights

Complementary Licensing Strategic Partner B

Field of Use 3Speculative


Target ApplicationsMarket Timing

Business Unit A

Vertical IntegrationStage-Gate Alignment

Viability

Target ApplicationsMarket Timing

Strategic Partner B Partner ContributionsLicensing Economics

IP Risk AnalysisNature of IP Claims (e.g., COM)Qualitative Scoring

Stage-Gate AlignmentViability



Market Scenario Analysis Market Risk Analysis


Case Study – Biolipid Market Scenarios

Vertical Integration Avanti Polar Lipids, Inc.

Medical Nutrition Stand-Alone Mfg. and Distrbn.

License to Pharma Axcan (Scandishake), Ross (Abbott), Bristol Myers, etc.

Nutrition Products Organization

License to Pharma Janssen (J&J), Sirion Thereapeutics (Sytera), Pfizer, etc.Active Compound Developer/Manufacturer

Drug Delivery License to Drug Delivery Eurand, N.V., Biovail Corporation, etc.

IP Rights Delivery and/or Formulation Platform Provider

License to Contract Mfg. Avanti Polar Lipids, Inc., Ben Venue Laboratories, (Boehringer Ingelhe Outsourcing

DermatologySpeculative

(Sports) NutritionSpeculative


Case Study – Biolipid Risk Characteristics

Vertical Integration CF Viability Strongest (Taste Improved But Not Optimal) HIV, Cancer, etc. Malnutrition ≠ Compromised ability to break down fat

Medical Nutrition Unknown Pathophysiology Between Conditions

Need ClinicalInvestigation License to Pharma

"NIH Syndrome"

License to Pharma"NIH Syndrome"Active Ingredient Savings < IND Cost

Drug Delivery License to Drug Delivery Portfolio Expansion

IP Rights Hydrophilic Benefit8 yr. RUL U.S. COM Claims Rate of Diffusion BenefitMethod Work-Arounds Highly Litigious IP

License to Contract Mfg. Differentiator

DermatologySpeculative Same Mechanism as Drug Delivery

Highly Litigious IP

(Sports) NutritionSpeculative Bioavailability Issues (Bulk)

Not Tested On HealthyUnderweight Product ≠ Overweight Nutrition Solution

Combining uncertainties through large-scale organization

Increasing control of the situation

Slowing the march of progress

Increasing knowledge, that is, by highlighting what comprises value, without blurring risk and uncertainty through a measurement problem


How to decrease uncertainty

Traditional valuation is focused on a model or construct for measurement (the “how”), as opposed to a conception on definition (the “what”)

Traditional valuation is holistic and as such results in a “price”

Traditional valuation hinders communication, that is, the parts of any whole cannot exist and cannot be understood except in their relation to the whole;

Traditional valuation is “model risk agnostic”


The notion of measurement vs. communication

29% 7% 29% 37% 18% 22%

6 5 4 3 2 1

Weight

Strength of Analysis Analytically D

erived R

oyalty Rate

Analysis

Public D

omain

Revenue P

rojections

Em

pirical Royalty

Rate A

nalysis

Existing R

evenue P

rojections

Assessm

ent of Risk

Existing D

CF

Projections

0.05 Sports Nutrition ○ ○ ○ ○ ○ ○ 0%

0.04 Dermatology & Cosmetic ○ ○ ◔ ○ ○ ○ 0%

0.53 Drug Delivery ◑ ◑ ◑ ○ ○ ○ 17%

0.52 Medical Nutrition - Other ◑ ○ ◑ ◑ ◔ ○ 33%

1.01 Medical Nutrition - CF ◑ ○ ◑ ● ◑ ◕ 38%

Very good confidence 1 ●Good confidence 3/4 ◕Some confidence 1/2 ◑

Not much confidence 1/4 ◔No confidence 0 ○

Weighted

Average

Priority

Priority

Weighted Average

Weighted Confidence Map

Existing DCF Projections

Existing Revenue Projections

Empirical Royalty Rate Analysis

Medical Nutrition - CF

Medical Nutrition - Other

Drug Delivery

Dermatology & CosmeticSports Nutrition

Public Domain Revenue Projections

Assessment of Risk

Analytically Derived Royalty Rate Analysis

0%

10%

20%

30%

40%

0123456

Priority

Confidence

Strength of Valuation Analysis Strength of Application Analysis


Case Study: Ability to Quantify – Model Risk

Strength of Application AnalysisMedical Nutrition - CF 38%Medical Nutrition - Other 33%Drug Delivery 17%Dermatology and Cosmetic 0%Sports Nutrition 0%

Strength of Valuation AnalysisExisting Revenue Projections 37%Empirical Royalty Rate Analysis 29%Analytically Derived Royalty Rate Analysis 29%Existing DCF Projections 22%Assessment of Risk 18%Public Domain Revenue Projections 7%

Vertical integration/JV model of Cystic Fibrosis – Medical Nutrition Use

Licensing model of CF – Medical Nutrition

Licensing model of CF, HIV, Cancer, Eating Disorders, Underweight Elderly, and Organ Transplant – Medical Nutrition

Licensing model of Drug Delivery


Case Study Actions


Case Study – Quantifying Risk

Characteristics Low High Start-Up 1st Stage Expand IPO

Unproven technology, new market 50% 70% x x xNew product, new technology, new market 35% 45% x xNew product, not well understood, existing market 30% 40% xNew product, well understood, existing market 25% 35% x xNew features, well understood, existing market 20% 30% x

50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0%

CF Nutrition- Model 1

Other Med NutritionDrug Delivery

Required Rate of Return

CF Nutrition- Models 2,3

Promising efficacy studies related to Cystic Fibrosis malnutrition, coupled with personal investor preferences, suggest narrowcast approach

Additional market segment value (Other Medical Nutrition, Sports Nutrition, Cosmetics, and Drug Delivery) is compromised by necessary investment and time to establish commercial viability and adoption

JV with contract manufacturer for CF malnutrition, based on total vertical integration value ranging between $10MM and $20MM, with a 20% chance that value is less than $14MM, or greater than $18MM


Case Study Recommendations

In-licensing should be focused on value, out-licensing should be focused on price does this seem counter-intuitive?

Licensee is purchasing a covenant-not-to-sue. However, the licensee is a price-taker in that she will be willing to pay up to the maximum value provided by the freedom to operate

Licensor is potentially trading reasonable royalty against lost profits, and therefore will seek to extract maximum consideration

Licensees need to focus marginally more on the notions of risk, measurement, and valuation

Licensors need to focus marginally more on the notions of uncertainty, communication, and exchange


Implications for Licensing Today

Marks, et al are subject to less of a dichotomy between monopoly rights and enablement, when compared with patents vs. know how

Marks impose more operating risk (short half-lives without continuing investment)

Mark equity is a function of underlying complement assets, that is, complement assets both catalyze and benefit from increasing market power

As a result, Marks inure more readily to goodwill and need to be treated more like franchise assets


Unique Considerations for Brands

The Sorbi Group, LLC

3061 Doriann Drive

Northbrook, IL 60062

www.thesorbigroup.com

Rick S. Nathan, ASA, CFA

Managing Director

847-562-4002 (voice)

847-521-4939 (fax)

[email protected]


Thank You