1. When and How to Monetize Your IP by Selling Your Royalty Stream
Louis P. Berneman
Christopher T. Cox

2. 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

3. 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.

4. 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

5. AUTM Journal Tomorrow’s Technology Transfer Volume 1, Number 1 Fall 2008

6. Royalty Monetization Royalty Monetization
License Agreement
Academic Institution IP
Pharma Company
Royalty Monetization
$ 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
Royalty Monetization
License Agreement
Academic Institution
Pharma Company IP
$ Royalties
$ Milestones
$ Royalties
$ Upfront Payment
$ Milestones
Royalty Investor

7. 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

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

9. 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)

10. 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

11. 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

12. 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)

13. 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

14. Risks Around Forecast Revenue

15. Inventors have caught on…
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…

16. Timing Risk: BMS – Zerit®
Approved in 1994 for the treatment of HIV/AIDS
July Yale University sold 70% of its royalty on Zerit for $115MM
Analyst Average 2000 (time of deal)
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
Actual Sales
Source: BMS historical 10Ks; Washington CORE Mar 2004

17. Ramp Risk - Cervarix® and Gardasil®
Combined Cervarix® and Gardasil® Sales Projections ($MM)
Valuation Gap
High Expectations
Commercial Reality Sets In
Source: Equity Research

18. 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

19. Horizontal (Safe) Strip
Investment Date : November 2005
Committed Amount: $45 million
Marketer: Merck
Product: RotaTeq
Indication: Rotavirus Prevention
Counterparty: The Wistar Institute
Financing provided cash and mitigated commercial risk
Situation Overview
Benefits of Financing
Wistar wanted cash to fund expansion and new research projects
Transaction Structure
$45 million:
$1 million upfront (pre FDA approval)
$44 million upon US approval
Wistar retains all royalties on sales over $300 million

20. 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

21. Key Components of a RM Transaction
Most Active Investors (Buyers)
Key Investment Criteria
Valuation Issues
Transaction Structure and Timing
Due Diligence Process
Transaction Documentation

22. Most Active Buyers Capital Royalty Cowen Healthcare Royalty Partners
DRI
Paul Capital Partners
Royalty Pharma
Licensee/sublicensee (royalty payor)

23. 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

24. Deal Structure of a Sale

25. 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

26. 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)

27. 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

28. 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)

29. Louis P. Berneman, EdD, CLP
Texelerate, LLC
2119 Delancey Place, Suite 400
Philadelphia, PA
phone
fax

30. Cahill Gordon & Reindel LLP Eighty Pine Street
Christopher T. Cox
Cahill Gordon & Reindel LLP Eighty Pine Street
New York, NY Phone
Fax