When and How to Monetize Your IPby Selling Your Royalty StreamLouis P. Berneman

Christopher T. Cox

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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

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Christopher T. CoxChris 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 JournalTomorrow’s Technology

TransferVolume 1, Number 1 Fall 2008

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Royalty Monetization

Academic InstitutionAcademic Institution

IPPharma

CompanyPharma

Company$ Royalties

$ Milestones

License Agreement

Royalty MonetizationRoyalty Monetization

IP

$ R

oyal

ties

License Agreement

Royalty InvestorRoyalty Investor

$ M

ilest

ones

$ Upfront

Payment

$ Royalties

$ Milestones

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

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

Royalty Monetization

Academic InstitutionAcademic Institution

Pharma CompanyPharma

Company

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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

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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

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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 seller10

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

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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− Royalty payment offsets (e.g., patent prosecution and

enforcement expenses, settlement costs, tax withholding, payment clawbacks)

− 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

$0

$10

$20

$30

$40

$50

$60

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

Ro

yalt

ies

($M

M)

OUTPERFORM

BASE CASE

DELAYED LAUNCH

SLOW LAUNCH

UNDERPERFORM

PULLED FROM THE MARKET

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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®

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Sal

es (

$MM

)Approved in 1994 for the treatment of HIV/AIDS

July 2000 -Yale University sold 70% ofits royalty on Zerit for $115MM

Approved in 1994 for the treatment of HIV/AIDSJuly 2000 -Yale University sold 70% of

its royalty on Zerit for $115MM

Analyst Average

2000(time of

deal)

Actual Sales

Source: BMS historical 10Ks; Washington CORE Mar 2004

Black Box Warning01/05/01: 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

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$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Analyst Average (Dec. 2006) Analyst Average (Jan. 2010)

Ramp Risk - Cervarix® and Gardasil®

Valuation Gap

Source: Equity Research

High Expectations

Commercial Reality Sets In

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

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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

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Horizontal (Safe) StripProduct: RotaTeqIndication: Rotavirus PreventionCounterparty: The Wistar Institute

Investment Date : November 2005Committed Amount:$45 millionMarketer: Merck

Situation Overview

Transaction Structure

Benefits of Financing Wistar wanted cash to fund

expansion and new research projects

Financing provided cash and mitigated commercial risk

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

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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

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Most Active Buyers

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

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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

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Deal Structure of a Sale

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Year

Ro

yalt

ies

($M

M)

RISK

SELL "SAFE TIER"

RISK SHARING

SELL ENTIRE

ROYALTYREMOVE ALL RISK

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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

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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)

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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

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The Auction Process• Confidentiality Agreements with Bidders• Process Letter

– CDA– Often two rounds of bidding– Indications of interest (first round)– Binding bids (second round)

• Information Memorandum– License Agreement– Royalty reports– Draft Royalty Purchase Agreement– Independent Consultant’s Report (if

applicable)

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Louis P. Berneman, EdD, CLP

Texelerate, LLC2119 Delancey Place, Suite 400Philadelphia, PA 19103-6511

berneman@texelerate.net215-275-8492 phone

888-319-6344 faxwww.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 ccox@cahill.com

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