Technology Licensing

Ken Porter

Steamboat Mountain SolutionsCopyright 2011

All rights reserved

• University patents–Prior to Bayh-Dole — 250 issued per year–FY 2004 — 3,700 US patents issued

11,000 US applications filed

• Economic impact–FY 2004 — 4,800 licenses/options executed

$1.4B license income$40B annual contribution to

economy $0 APPROPRIATION

Bayh-Dole ActPatent and Trademark Act Amendments of 1980

Criticisms of Bayh-Dole

Created bureaucracies, i.e., tech transfer offices,

with a mission of• short term revenue maximization,

as opposed to• long term volume maximization

of transferred technologies• 40% of offices’ revenue <$600k after patent

expenses, but before salaries

Time and patience mis-match

Nature of Technology

Life Sciences Physical Science Engineering Software

Product cycle : long short

Patent dependence: high low

Disposition: exclusive open source

Solution: variable, technology-appropriate, approach1. patent strategy, e.g., worldwide, US only, copyright2. financial remuneration, e.g., royalties + milestones, for

open source, release from liability only

Revenue expectations match

Funding model of the office

If survival depends on revenue, then must have enough money early to cover expenses; trade off downstream bonanza• Patent — past expenses recovered at execution• Operating — high up-front fees

For profit, license revenue necessary, thus

When you make money, we make money• Low or no up-front fees• Patent costs recovered over time internally• Assistance available to advance inventions to market• Return captured through milestone events & royalties

Private use of public facilities– Corporate-sponsored research at a

tax-exempt institution is allowed– Resulting technology may be licensed exclusively to

sponsor– Sponsor must pay competitive price– Good practice provides for conditional royaltiesMantra — “Private Use of Public Facilities” & “IRS”Problem is definition & ID of public facilitiesOnly solution is to treat all UT space as public

IRS Revenue Procedure 97-14 Internal Revenue Code of 1986

Revenue Distribution

• Division of income stipulated, UT 50/50, UTHSCSA:

Inventor HSC Unit** Dean

≤ $250,000 40% 27.5% 27.5% 5%

>$250,000 40% 37.5% 17.5% 5%

Licensing: What do you want?APPENDIX A

FIELDS OF USE and TERRITORY

Field should be defined inclusively; That is, carve out defined use for licensee and keep all else

Territory can exceed patented countries

License of Know-How can extend royalty collection beyond patent protection

Meridian royalties due on Net Sales in other countries based on the degree of exclusivity experienced by Meridian in those markets (first mover advantage provided by access to CU IP, information, and personnel; exclusive license confers monopoly)

KM Labs prosecutes patent applications sufficient to discourage market entry of

directly competing products in any foreign countries; enables “worldwide” status

APPENDIX B

PATENT RIGHTSRights should be free and clear of 3rd party MTA/SRA obligations

MTAs avoid exclusive rights to two parties (4th party)SRAs offer option to elect a license,

avoid exclusive worldwide rights w/o patent cost coverage

Article 2. Grant of Rights

Exclusive (Licensee Broker)

Exclusive in a Field/Territory (Licensor Broker)

Non-exclusive (Field/Territory)

Improvementsany invention, the practice of which would also require

the practice of an invention claimed in or covered by the Patent Rights

Caution: limit to inventor, involvement, time period

HHMI doesn’t allow, feds are persnickety

What do we want?APPENDIX CROYALTIES

• Issue Royalty (eg investment to date; see product life cycle)• Earned Royalty (calculated from Net Sales, which is defined by LP/LP,

which are defined by Patent Rights (include pending claims) and Know-How, which use is transferred in the Grant of Rights; include non-cash compensation, sold when invoiced)

• Minimum Annual Royalties (can proxy for diligence)• Milestone Royalties (diligence)• Sublicense Royalty (pass-through or not; Net Sales definition, “by or on

behalf of Licensee,” and define Sublicense Revenue)

Article 3. SublicensingArticle 5. RoyaltiesArticle 6. ReportingArticle 8. Patent, Costs, EnforcementArticle 10. Termination

What do we want?

APPENDIX E

PERFORMANCE MILESTONES• Clinical trials• Prototype, first sales deadlines• Sales guarantees

Article 7. Due Diligence and PerformanceArticle 10. Duration and Termination

• Licensor Option to terminate or revert to non-exclusive

Requirements

Article 4. Government (if applicable) and University Rights• Bayh-Dole• Transferable license for non-profit research (push back — benefits IP in most

cases)• Publication rights, six months total maximum delay

Little to no interference with academic freedom

Article 9. No Warranties, Indemnifications, InsuranceLicensee responsible for due diligence

• Fitness for use• Infringement • Freedom to Operate• Validity of Patent Rights• Broad indemnification • Insurance required at appropriate level

Risk management

SubtletiesLicensed Products• Issued or pending claim• Know-How; if in grant of rights needs to be in LP/LP (royalties)• Manufactured or Discovered though Licensed Process

Dharmacon — Royalties due on License Products (nt) and Licensed Process (oligos) sales

• Discovered through Licensed Product, e.g., drug targetConforma Therapeutics for HSP90 crystal and drug screen;stock and 0.5% royalty

Patent Misuse and Reach-Through Consideration• Patent misuse occurs when a patent holder demands royalties beyond

the scope or the term of a patent• However, a reach-through royalty may be the only way to

determine/capture the value of an invention• To avoid patent misuse

•Include non-sales based compensation, e.g., equity, milestones•Agree that sales royalties are actually time-shifted payments•Include acknowledgement that licensee voluntarily elected toextend payment otherwise due within the patent term

SubtletiesPatent Prosecution• Licensee always pays (cost of doing business)• If we direct, Licensee advises• If Licensee directs, no change in scope of claims w/o written

permission• If unsatisfied, we may re-assume at Licensee expense

Patent Enforcement• Exclusive Licensee has first right to institute suit

– 50% of royalty may be used to support prosecution– If sole, retain settlement less royalties

• Joint, if both parties agree– share proportionate to expenses borne

Patent Defense• Exclusive Licensee has right to defend

– Retain damages and awards– May not deny validity w/o written consent

• Licensee may not compel Licensor to initiate or join action• Licensor may institute or join suit

•Market Approach–Comparables, Knowledge Express, TTO experience

•Cost Approach (set up-front fee)–Research $ (5 research projects for 1 success?)–IP Prosecution $–Discount Factor

•Income Approach–Discounted sum of future cash flows, i.e. NPV–Option pricing, Black-Scholes formula, decision

points increase value relative to NPV–Rule of thumb – 25% Rule

Valuation Approaches

Risk level Discount rate Description

Risk Free 10-18 Existing product

Very low risk 15-20 Improved existing product

Low risk 20-30 New product, wu technology, Riverware, OASIS existing market

Moderate risk 25-35 Same as above with competition SONIC

High risk 30-40 New product, nwu technology, Merck, Azaya, lead cds existing market

Very high risk 35-45 New product, new technology, e-pump, audioweb, Buffalo Switcher new market

Extremely high 50-70 New company, unproven Cold Quanta technology, new market

Discount Factors

Product Life CycleSa

les,

Cos

t & P

rofit

Introduction Maturity Decline “cash cow”Growth

Expenses Sales Revenue

Time

Cash flowLoss

Profit

* Licensor research allows Licensee to start here

*

Licensee would like to neglect research costs and technical risk, and emphasize development cost and commercial risk.Solution is to analyze mature operation; if consider development costs, then amortize over the product life

Upfront feeDiscount factorCredit is not unreasonable:

time value of moneybook as prepaid royalty (asset)

Research

A fair return is 25% of Operating Profit= revenue less cogs less overhead

•Empirical

•Retrospective study indicates 25-33% of profit is commonly observed across licenses in many markets (university royalties 2 to 3 fold lower than corporate)

•Robert Goldscheider (late 1950s)

•Starting point for courts in infringement suits

25% Rule

Path to a commercial product

25% research = Licensor component

25% development

25% manufacture

25% sales & marketing

25% RuleJustification

Pre-commercialization Sales Royalty (See Nature Biotech 21:618)

‘80 – ‘03 0.8 M 4 %

‘95 – ‘03 1.9 M 4 %

Today 5%/5M minimum no preclinical

Univ / Biotech / Pharma

7 : 29 : 64 19% 31%

r d ct m s&mt (see HtED pt IV)

20 20 20 20 20

Pharmaceutical License20% Rule?

Relevant factors for determining a reasonable royalty

1. Established royalty 10. Benefits2. Infringer comparable royalty 11. Extent of infringing use3. Degree of exclusivity 12. Industry-accepted rate4. Licensor’s established position 13. Infringer comb. credit5. Degree of competition 14. Expert opinion6. Synergistic value 15. Hypothetical negotiation7. Patent life8. Established profitability9. Market advantage

Valuation ToolsGeorgia-Pacific V. US Plywood

Licensing Financial Terms

Financial expectations set by funding model • Expenses

– Cannot subsidize business e.g., patent costs

– can offer easy termsresearch access, funds

• Revenue – when Licensee earns a return,

Licensor must be paid

Licensing TermsAUTM 9 Points

• Transferable license for non-profit research• Exclusivity requires utilization

– field, sublicense• Improvements must not hinder future research

– PHS 5-year guideline • Must avoid COI

– faculty/entrepreneur research funding• Provide wide access to research tools

– license sale of products/services, not use • Enforce surely and selectively

Licensing TermsAUTM 9 Points (cont)

• Mind export regulations• Favor bundling, not patent troll, aggregators• Address unmet societal needs

– facilitate access to medical & agriculturaltechnology for 3rd world nations

•Fair financial terms can be determined–Licensee financial analysis is reliable **Merck, Gammex–One-half projections are good MAR–Sales based bonuses provide fair returns

•Legal risk can be mitigated by conditional terms

•Solid analysis builds confidence _ the science

•Know when to say when _ the art

Summary