ip exploitation strategies and best practices for the current economy
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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?
April 27, 2010 © 2010, The Sorbi Group, LLC 3
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
April 27, 2010 © 2010, The Sorbi Group, LLC 4
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
April 27, 2010 © 2010, The Sorbi Group, LLC 5
The notion of price versus value
April 27, 2010 © 2010, The Sorbi Group, LLC 6
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.”
April 27, 2010 © 2010, The Sorbi Group, LLC 7
The notion of risk vs. uncertainty
April 27, 2010 © 2010, The Sorbi Group, LLC 8
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
Field of Use 4Speculative
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
Field of Use 3Speculative
Field of Use 4Speculative
Market Scenario Analysis Market Risk Analysis
April 27, 2010 © 2010, The Sorbi Group, LLC 9
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
April 27, 2010 © 2010, The Sorbi Group, LLC 10
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
April 27, 2010 © 2010, The Sorbi Group, LLC 11
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”
April 27, 2010 © 2010, The Sorbi Group, LLC 12
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
April 27, 2010 © 2010, The Sorbi Group, LLC 13
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
April 27, 2010 © 2010, The Sorbi Group, LLC 14
Case Study Actions
April 27, 2010 © 2010, The Sorbi Group, LLC 15
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
April 27, 2010 © 2010, The Sorbi Group, LLC 16
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
April 27, 2010 © 2010, The Sorbi Group, LLC 17
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
April 27, 2010 © 2010, The Sorbi Group, LLC 18
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)
rnathan@thesorbigroup.com
April 27, 2010 © 2010, The Sorbi Group, LLC 19
Thank You
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